PIMCO Chief Economist Paul McCulley, in his first commentary since returning to the bond shop in late May, says the war on inflation “is over.” McCulley adds that “new neutral” federal funds rate is 2%, which means today’s markets are fairly valued.
“The war against inflation initiated by [Federal Reserve Chaiirman Paul] Volcker in 1979 is over, done, finished; we won some 15 years ago,” he explained in his piece “Just Give Me a Framework” on Thursday.
“Accordingly,” he said, “the secular Fed strategy known as ‘opportunistic disinflation’ is dead, along with its companion cyclical implementation strategy of ‘pre-emptive tightening.’ ”
Explaining the implications of his views on CNBC later in the day, McCulley outlined likely Fed action in 2015.
“I think the Fed will tighten next year, but it’s not trying to pre-empt an increase in inflation,” he said on the station. “In fact, the Fed’s told you it won’t hike until after inflation has moved up closer to target. That is a profound paradigm change.”
Though he called recent Fed actions “responsibly irresponsible,” McCulley acknowledges that the policies “have worked.”
“Escape from the Liquidity Trap nears, with the heavy lifting having been done by endogenous delivering of private-sector balance sheets through the alchemy of rising bond and equity prices and valuations, which are fundamentally grounded in structural reduction in the central bank’s neutral real policy rate,” the economist noted in his PIMCO comments.
“We’ve had our cyclical ups and downs but when you look at it on a chart, I think we’ve achieved the promised land of price stability over many cycles,” he shared on CNBC.
Given this stability, bonds and stocks are at “fair valuations,” McCulley added, and are not at “artificial” levels.