Richard Clarida, global strategic adviser at Pacific Investment Management Co. (PIMCO), talks about the outlook for the global economy and implications of the “new neutral.” Clarida speaks with Bloomberg’s Tom Keene, Scarlet Fu and Adam Johnson on Bloomberg Television’s “Surveillance.” James Lockhart, vice chairman of WL Ross & Co., also joined the discussion.
Video and excerpts below
Clarida on how the ‘New Neutral’ is different from the ‘New Normal’:
“There are really three key elements. One we are in a multispeed world now of countries converging to slower trend growth rates. Number two it’s a world in which these economies face an overhang of leverage so we really haven’t had any deleveraging in the past five years in the aggregate with a lot of budget deficits. And number three policy makers can and will recognize that. They will keep rates lower for longer and when they start to hike the destination will be at a much lower rate than before.”
On what was different without El-Erian:
“I’ve been at nine of these. This was the first that I had the pleasure to organize. I think the process has worked well for 35 years. The difference is there is a different set of issues on our plate than several years ago. We use the term ‘robust and free-flowing discussion.’ I can tell you it was a very robust and free-flowing. At the end of the three days we ended up with an organic sense of this thesis and we feel very comfortable with it.”
On what the ‘New Neutral’ means for the Central Banks:
“What is means they will have to tread very carefully once they begin to hike and of course you have the ECB who is still in mode to ease, the BOJ that is still easing. Over the next three to five years the Fed and the Bank of England will start to hike rates and our view is they will start to hike them at very slow pace and they are not going to get those policy rates up to 4% as they expect and that is the ‘new neutral’.”
On whether bubbles are more likely to occur in the ‘new neutral’:
“In essence of monetary policy now, year 6 after the crisis is to keep the game going to keep the global economy growing at whatever pace it is, this going to require lower rates. I think policy makers in general feel the way to deal with excess and pockets in credit markets is a macro-prudential approach. Not by raising rates on everyone in the economy. I think going forward, and Janet Yellen said as Vice Chair said her preference was to not to hike to deal with bubbles but to use prudential tools so I think that will be the first course of action.”
On PIMCO’s take under the ‘new neutral’:
“Our take under the ‘new neutral’ is that the Fed is really focused now on inflation. And they are focused on actual inflation. The Fed’s record of forecasting inflation hasn’t been very good, neither is mine but they get paid to do it. Until we actually see inflation approaching the 2% target they will be very wary I think of pre-emptively hiking rates. We will be focusing on inflation late 2015 early 2016 for the first time.”
On global slack:
“Of the world’s major players, the US is in the best shape, we have had the most deleveraging, we have actually had the best policy to deal with the aftermath of the crisis and we’re the closest to potential for the economy. If you look at Europe, the good news they are not in the mode of a crisis the bad news is they will grow at 1 and half percent this year. And if you look at China three and half years ago when I was doing this show they were growing at 12, then it was 9 now it was 7. We think it is going to be very tough even to keep growth in the 6% to 7% range because they have a huge shadow banking system. Globally there is slack… We think it is going to be very tough to have a 7 handle on China growth for the next five years… Our view on China is they have a really big problem with shadow banking but they have a huge wallet. They have the will. Our focus on China is really on the execution risk to limit the shadow banking system…”
