“In many ways what we’re seeing in the Western world now is similar to the long term growth environment that Japan has been living with for 20 years,” added Bierre. In his view; given these figures, the Fed shouldn’t move all the way back to the 3.5-4% expectations they had at the beginning of the rate rising cycle.
The 3.5-4% expectation essentially corresponds to a policy rate close to the long term nominal growth rate in GDP, which means there is no risk premium from a monetary policy rate to a long term expected investment in the real economy. And that in turn would kill the global economy.
So the new long term outlook for policy rates is “significantly lower” than what the Fed used to believe – Bierre would still consider 3% a high level in today’s growth environment.
“Corporate earnings have also stalled,” said Asbjorn Hansen, head of Nordea Asset Management’s asset allocation team. “The equity market, at least in the Euro area, hasn’t moved anywhere in the past ten years.” Equities took the hit first, and now it’s the bond market’s turn, according to Hansen. “But we’re not getting back to nominal earnings growth of 8% for the next ten years.”
Bierre points out that if the volatility of the business cycle has not changed, then as soon as you get to a lower trend you will also more frequently move into negative territory, which means that markets will be much more sensitive to even minor changes.
“This year has been a textbook example of how the Fed has fluctuated in its views. Every time they’ve turned a little bit hawkish, financial conditions have tightened dramatically through the market mechanism and then the Fed has been forced to step away and markets have calmed,” commented Bierre.
