Work Left After a Cliff Bargain, Pimco’s Clarida Says: Tom Keene

A likely agreement to avoid automatic U.S. tax increases and spending cuts will still leave a lot of budget work to be done next year, according to Pacific Investment Management Co. strategist Richard Clarida.

Lawmakers return to Washington today amid a potential thaw in the U.S. fiscal policy dispute, as President Barack Obama and House Speaker John Boehner attempt to make a deal to prevent spending cuts and tax increases from taking effect. Democratic lawmakers and Obama continue to insist that Republicans accept higher tax rates for top earners before they will propose spending cuts.

“I think we actually get an agreement before Jan. 1, but there will be a lot of unfinished business, and this will be going on well into 2013,” Clarida said in a television interview on “Bloomberg Surveillance” with Tom Keene and Sara Eisen. “The center of gravity in Washington is to avoid the full hit of the fiscal cliff. This is really a proposal going forward to start to put us on a more austere path, which means if there is austerity, it will be back-loaded to a large extent.”

If nothing changes, the stalemate may lead to a recession in the first half of 2013, according to the Congressional Budget Office. Obama and Boehner are trying to replace the immediate deficit reduction in the so-called fiscal cliff with more gradual tax and spending changes.

Outlook Issues

“Generalized uncertainty about the fiscal cliff in particular has impacted capital spending this year just because there is uncertainty over the cost of capital,” said Clarida of Pimco, the world’s biggest manager of bonds funds. “If you don’t know what the cost of capital is, it’s hard to make an investment plan. If that were to be resolved, that’s a positive for 2013.”

The Federal Reserve’s debt purchases, known as quantitative easing, kept long term Treasury yields and mortgage rates low, supporting growth, said Clarida, who is also a professor of economics and international affairs at Columbia University.

The Fed begins today a two-day meeting of policy makers. The central bank is expected to increase record accommodation by announcing tomorrow $45 billion in monthly Treasury buying that will push its balance sheet almost to $4 trillion, according to a Bloomberg survey of economists.

What the Fed is doing “is working in an important sense that we’ve avoided deflation, with inflation running at about 2 percent, and we are seeing progress on unemployment,” Clarida said.

The U.S. economy added 146,000 jobs in November, beating economists’ forecast for an 85,000 gain. The unemployment rate fell to 7.7 percent as 320,000 people left the workforce. The jobless rate had stayed above 8 percent since February 2009 until it fell to 7.9 percent in September.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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