The recent FOMC meetings continue to feature a range of debate only around the rate at which the Fed Funds rate can be increased up to about 4% (which has not coincided with a robust economy since the late 1990s). They actually describe this as a 'normal' rate, and the process of raising the rate as 'normalization'. The 'Dot Plot' pictured here indicates the paradigm that the Federal Reserve still believes. Even the most 'dovish' members still think that the Fed Funds rate will be above 2% by 2019.
This is dangerously inaccurate. At the start of 2016, the Federal Reserve expected that they will do four rate likes this year itself. Now they are down to an expectation of just two (one more than the one early in this year), and may just halt with one. How can a collection of supposedly the best and wisest economic forecasters be so consistently wrong? A 20% stock market correction will lead to a swift rate reversal and a 25%+ correction will lead to a resumption of QE in excess of $100B/month.
As we can see in the ATOM e-book, technological deflation is endless and exponentially increasing, and hence the Wu-Xia shadow rate indicates the natural Fed Funds rate for the US to be around the equivalent -2%. Yes, minus two percent, achieved through the various rounds of QE that have been done to date in order to simulate a negative interest rate. The US stopped its QE in 2014, but continues to be held afloat by a portion of the $220B/month of worldwide central bank easing that flows into the US. This is barely enough to keep US Nominal GDP (NGDP) growth at 3%, which is far below the level at which innovation can proceed at its trendline rate. The connection between technological progress, technological deflation, and worldwide central bank action is still not being discovered by decision-makers.
The -2% indicated by the Wu-Xia shadow rate might be as deep as -4% by 2025, under current trends of technological diffusion. The worldwide central bank easing required to halt deflation by that time will be several times higher than today. As per the ATOM policy reform recommendations, this can be an exceptionally favorable thing if the fundamentals are recognized.
For the full analysis and thesis, read the ATOM e-book.
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