The six members of PIMCO’s Global Advisory Board, a team of world-renowned macroeconomic thinkers and former policymakers, recently joined the discussion at PIMCO’s annual Secular Forum, where they addressed critical factors likely to shape the global economy over the three- to five-year horizon. The board’s insights constitute a valuable input into PIMCO’s investment process. The discussion below is distilled from their far-ranging conversation.
Q: What is the outlook for U.S. growth, business sentiment and monetary policy over the secular horizon?
A: Tailwinds supporting continued U.S. growth, at least over the early part of the secular timeframe, include the synchronized global recovery, accommodative financial conditions, tax reform, the regulatory environment and the fiscal policy impulse. Demographics are a drag on growth, but over time we could see productivity begin to improve.
“IF TIGHTENING FINANCIAL CONDITIONS DO SOME OF THE FED’S WORK FOR IT, THEN IT DOESN’T HAVE TO BE QUITE AS AGGRESSIVE ON SHORT RATES.”
- BEN BERNANKE
Recent tax reform, along with a more business-friendly regulatory environment, could boost U.S. business confidence significantly. The move to a territorial tax system helps businesses make capital allocation decisions based on efficiency and strategy, not just tax awareness – and they now feel they’re on a more level playing field relative to their non-U.S. peers. And while we’re not necessarily seeing a significant rollback of regulation, the absence of any prospect for substantial further regulation removes a major source of uncertainty for many businesses. In the longer term, however, the significant increase in the deficit implied by recent policy changes will likely reduce U.S. fiscal “space” and the government’s ability to respond to new challenges.
Inflation is increasing in the U.S., but only moderately. The Federal Reserve believes the Phillips curve is quite flat, meaning that low unemployment won’t necessarily translate into an acceleration in inflation. Moreover, the Fed appears willing to accept a modest overshoot of its inflation target. Accordingly, we expect the Fed will continue to raise rates gradually, though it may overshoot neutral at some point. The Fed has reasonable policy tools to respond to the next economic downturn, which could feasibly arrive over the secular horizon, provided the recession is not too deep. However, given the Fed’s limited room to cut rates and the reduced scope for fiscal expansion, a more severe recession would challenge policymakers.