When US 30-year yields hit 5% the Great Recession will be over
US bond yields are spiking today. You might expect me to celebrate it and say this is great (while everybody else are freaking out...) Well, you are right - it doesn't worry me the least bit. That said, the US story is not necessarily the same story as the Japanese story. Hence, while Japanese real yields actually have declined sharply US real yields continue to rise as break-even inflation in the US has actually declined recently - most likely on the back of a positive supply shock due to lower commodity prices. But obviously higher real yields should only be a worry if it is out sync with the development in the economy - as in 2008-9 when real yields and rates spiked, while at the same time the economy collapsed. However, if the economy is in recovery it is only naturally that real yields and rates start to rise as the recovery matures as it certainly seems to be the case in the US. Anyway, this is not really what I wanted to discuss. Instead I was reminded about something Greenspan said in 1992:
“Let me put it to you this way. If you ask whether we are confirming our view to contain the success that we’ve had to date on inflation, the answer is “yes.” I think that policy is implicit among the members of this Committee, and the specific instruments that we may be using or not using are really a quite secondary question. As I read it, there is no debate within this Committee to abandon our view that a non-inflationary environment is best for this country over the longer term. Everything else, once we’ve said that, becomes technical questions. I would say in that context that on the basis of the studies, we have seen that to drive nominal GDP, let’s assume at 4-1/2 percent, in our old philosophy we would have said that [requires] a 4-1/2 percent growth in M2. In today’s analysis, we would say it’s significantly less than that. I’m basically arguing that we are really in a sense using [unintelligible] a nominal GDP goal of which the money supply relationships are technical mechanisms to achieve that. And I don’t see any change in our view…and we will know they are convinced (about “price stability”) when we see the 30-year Treasury at 5-1/2 percent.“Yes, that is correct. Greenspan was thinking that the Federal Reserve should (or actually did) target NGDP growth of 4.5%. Furthermore, he (indirectly) said that that would correspond to 30-year US Treasury yields being around 5.5%. This is more or less also what we had all through the Great Moderation - or rather both 5% 30-year yields and 5% NGDP growth. However, the story is different today. While, NGDP growth expectations for the next 1-2 years are around 4-5% (ish) 30-year bond yields are around 3.3%. This in my view is a pretty good illustration that while the US economy is in recovery market participants remain very doubtful that we are about to return to a New Great Moderation of stable 5% NGDP growth. That said, with yields continuing to rise faster than the acceleration in NGDP growth we can say that we are seeing a gradual return to something more like the Great Moderation. That obviously is great news. In fact I would argue that when US 30-year hopefully again soon hit 5% then I think that we at that time will have to conclude that the Great Recession finally has come to an end. Last time US 30-year yields were at 5% was in the last year of the Great Moderation - 2007. We are still very far away from 5% yields, but we are getting closer than we have been for a very long time - thanks to the fed's change of policy regime in September last year. Finally, when US 30-year bond yields hit 5% I will stop calling for US monetary easing. I will, however, not stop calling for a proper transparent and rule-based NGDP level targeting regime before we get that.