The new austerity is underway, but it’s not clear that the bond market is optimistic about the implications for growth. The benchmark 10-year Treasury yield dropped to 2.66% yesterday, the lowest since last November. The sight of the crowd rushing into bonds at this stage isn’t encouraging. Meanwhile, the stock market cast its own vote yesterday via a hefty 2.6% tumble.
What can be done? The Federal Reserve seems to be the only lever left to pull. It’s no silver bullet, but policy could be more accommodative, as a number of economists advise. Here’s David Beckworth, who criticizes the Fed’s “passive tightening” policy:
A key problem behind this passive tightening of monetary policy is that money demand has been and remains elevated and the Fed has yet to successfully address it. What is frustrating is that the Fed could meaningfully undo this three-year passive tightening cycle by adopting something like a nominal GDP level target. For many reasons–its political capital is spent, internal Fed divisions, the popularity of hard-money views, etc–it won’t and so the U.S. economy remains mired in an anemic recovery.
And Scott Sumner observes:
Five year yields are 1.26% and falling almost every day. One need to look no further than the market for 5 year T-notes to see the increasing tightness of monetary policy. NGDP growth expectations are now falling rapidly.