Carlyle’s Thomas Says Time for Fed to Retire Restrictive Language (original) (raw)

• 00:00Let's talk about that word restrictive. What guides your view about how restrictive we actually are? Well, if you look at the last 18 months, the real Fed funds rate has been in excess of 2%. You know, that should be very restrictive. But yet, over that same horizon, we've had real GDP growth that's averaged nearly 3%, almost twice the level most forecasters had for the US is potential growth. We've had productivity growth that's exceeded 2% on an annual basis for the last five quarters. And of course we're left with sit with core CPI that is still above 3% when you add in measures of financial conditions, stock valuation ratios, credit spreads at 17 year tights. I do not see restrictiveness anywhere. One would look in the data and I think it's time to retire this language because in many ways it's also created some damage because it's created expectations among market participants, among investors, management teams that they should delay transactions, delay interest sensitive purchases, six months, 12 months, 18 months into the future when rates are lower. So I think just abandoning this language, changing the rhetoric, accepting that it looks that we're more or less at neutral today would actually be, I think, quite helpful in terms of many of the elements of the economy. Coming to terms with rates likely persist near these levels. Jason, what do you see the message as from the long end of the yield curve, the idea that as the Fed has cut by 100 basis points, the long end of the yield curve has risen by 100 basis points. I think it's the market repricing neutral. The term premium is estimated, right. It is the ten year yield in relation to expectations for short term rates over those ten years. What are those expectations? I think that that right now it's not so unreasonable to think for four and a quarter is going to be where the Fed funds averages over this this ten year period. If so, ten year yields at 460, that that's not really much of a term premium, at least when we look historically, the term premium in the nineties averaged about 150 basis points. So I think that we've been so used to during the period of QE, during the very large reserve accumulations, China, other central banks, we became accustomed to term premium that was zero or negative. And so a term premium that's modestly positive. People think, oh boy, this is a sign of concerns about the fiscal outlook or, you know, just the sheer volume of bond offerings. But but I think a much simpler expectation, a much simpler explanation is that the neutral rate has just been repriced by markets and it's moved into the four or four and a quarter range.

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