The Fed needs to stop raising rates

The writer is a philanthropist, co-founder of Pimco, and author of the 2022 memoir I’m Still Standing, Bond King Bill Gross and the Pimco Express.

“Love lift us up where we belong,” rings the theme song from the 1982 film An Officer and a Gentleman. Substitute the “Fed” for “love” and you have the theme of 2022-2023, with the global central bank’s captain, Jay Powell, doing the heavy lifting.

We need to renormalise the cost of money. Most of us would agree to this. But how high is that and for how long? Among economists, Larry Summers suggests as high as 6 per cent for the Federal Reserve’s target funds rate but Jeremy Siegel suggests 3 to 4 per cent is enough. As Fed chair, Powell strongly affirms we will be lifting higher from the current 4.25 to 4.5 per cent target, but warns that the peak in rates and its duration will depend on data in the months ahead.

I suggest several clues to this conundrum. First, aside from the critical focus on US employment, global growth and financial conditions, it is important to analyse what level and pace of real interest rates have historically slowed economic growth in past cycles and led to acceptable inflationary targets.

I emphasise real as opposed to nominal yields because the Fed’s and other central banks’ dream outcome is the infrequently mentioned “r-star” — the “neutral” level of overnight money rates net of inflation that is consistent with stable economic conditions.

This is perhaps too complex for widespread public use and is hard to calculate based on forward assumptions of the consumer price index. The 0 per cent or less rate that we saw in some recent years is also an anomaly given the trillions of dollars created under quantitative easing programmes.