Federal Reserve policy can’t resolve the biggest drags on the U.S. economy, said Richard Clarida, global strategic adviser at Pacific Investment Management Co.
“The main challenges facing the U.S. now are not monetary,” Clarida, of Newport Beach, California-based Pimco, manager of the world’s biggest bond fund, said in a television interview on “Bloomberg Surveillance” with Tom Keene, Sara Eisen and Scarlet Fu. “We have the headwinds from the fiscal cliff, from the slowdown in China, from the turmoil in Europe. None of those are monetary-policy issues.”
U.S. gross domestic product slowed to a 1.5 percent annual rate in the second quarter from a revised 2 percent gain in the prior quarter, Commerce Department figures showed in Washington July 27.
The U.S. faces a so-called fiscal cliff of higher taxes and reductions in spending on defense and other government programs that will take effect at year-end unless Congress acts. The spending cuts and tax increases amount to $607 billion, or 4 percent of GDP, as measured by the Congressional Budget Office.
China’s export growth collapsed and imports and new yuan loans trailed estimates in July, adding to signs the global economy is weakening.
“At the margin, I think the Fed believes where it can make a difference it will,” said Clarida, who is also a professor of economics and international affairs at Columbia University. “But it recognizes that this is not ultimately going to be a monetary-policy solution for these challenges.”
The U.S. central bank has held interest rates near zero since 2008 and plans to keep them there through 2014 to stimulate the world’s biggest economy. The Fed has also bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, or QE.
At the same time, the European Union’s 17-nation common currency faces an “existential threat,” and Europe’s biggest economy is also showing signs of slowing, Clarida said. The European Central Bank’s quarterly survey of professional forecasters showed yesterday that the euro-area economy may shrink 0.3 percent this year instead of a previously projected 0.2 percent contraction.
“Increasingly, the German economy is feeling the impact of the European turmoil,” he said. “Germany probably of all the countries has more room to maneuver, but again they don’t set interest rates for the euro area. They’re an export machine, and not just to Europe but also to the rest of the world. I think the options in Germany are limited right now.”
German industrial production declined in June, led by a drop in construction output. Production fell 0.9 percent from May, when it gained a revised 1.7 percent, the Economy Ministry in Berlin said Aug. 8. It was the third report this week to signal the German economy is cooling as the sovereign debt crisis erodes demand for its goods.