Last Friday, I wrote about That Stubborn Yield Curve in my Thoughts from the Frontline letter. In it, I quoted a few paragraphs by Pimco's Paul McCulley, but upon reflection, I feel that his whole letter is worthy of taking a look at more in-depth. Paul writes a monthly commentary, the Global Central Bank Focus that, because of its well-researched and unique perspective, is always at the top of my reading list. As a Managing Director at PIMCO, Paul is an intelligent economist and a self-proclaimed "religious Keynesian."
In his article "Time-Varying Variables Vary" (quite the tongue twister), Paul looks back upon his forecast for the Fed Funds rate and evaluates the "Taylor" formula. But one of the things that I like best about Paul is that, despite his lengthy analysis, he is a bottom-line kind of guy who always boils it down to the end result, which in this case, is the future decision making of the Fed.
With Morgan Stanley and Goldman Sachs each weighing in on opposing sides of the interest rate debate, I believe that you will find Paul's piece to be a truly "outside the box" point of view.
John Mauldin, Editor
Outside the Box
Time-Varying Variables Vary
Long before the Fed started its now- finished tightening campaign in June 2004, from a 1% starting point for Fed funds, we here at PIMCO analyzed and debated intensely where the "neutral" Fed funds rate might lie, notably in real terms.1 Bill Gross and I very publicly argued that both theory and long-history empirical work suggested that the neutral real Fed funds rate should be in…