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Goldman Shuns ‘New Neutral’ After Doubting ‘New Normal’

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Goldman Sachs Chief Economist Jan Hatzius
In 2014, Goldman Sachs Chief Economist Jan Hatzius sided with the view that monetary stimulus could help reduce unemployment, while Bill Gross argued joblessness was permanently elevated and would only by eased “at the margin” by easy monetary policy. Photographer: Jonathan Fickies/Bloomberg

June 10 (Bloomberg) -- Goldman Sachs Group Inc. didn’t buy the “new normal” and it’s not rushing to embrace the “new neutral” either.

Goldman Sachs economists led by Jan Hatzius and Dominic Wilson are questioning the bet made last month by investor Bill Gross that Federal Reserve monetary tightening will be much less aggressive than in the past -- when it comes.

“We do not disagree that the Fed funds rate will on average be at least modestly lower over the next 20 years than it was over the 20 years preceding the crisis,” New York-based economist Kris Dawsey wrote in a June 6 report. “We lean towards the view that the difference will not be drastic.”

Goldman Sachs is not alone in questioning the “new neutral,” the level at which the Fed benchmark neither stimulates nor slows the economy. The term was coined by Bloomberg News in a March 17 report and then promoted by Gross’s Pacific Investment Management Co. It describes the view that the Fed is unlikely to raise the rate much beyond 2 percent because potential growth is weaker and debt higher than before the recession.

Using bond yields and surveys of forecasters, Dawsey reckons investors anticipate a neutral rate of 3.8 percent, in line with the 4 percent projected by Fed officials. While Goldman Sachs still doesn’t expect the Fed to begin raising before 2016, it predicts the key rate will reach 4 percent at the end of 2018.

Stimulus Disagreement

It’s not the first time Goldman and Pimco have disagreed. In 2012, Hatzius endorsed the view that monetary stimulus could help reduce unemployment, while Gross argued joblessness was permanently elevated and would only by eased “at the margin” by easy monetary policy.

For Goldman Sachs, bets on the neutral rate traditionally lag the economy’s health and so a further improvement in the expansion will raise expectations for how high the Fed can go. In the 1930s, for example, it estimates the neutral rate rebounded relatively quickly after plunging to almost minus 8 percent during the Great Depression.

Were the neutral rate much lower than before the crisis, then the Fed also wouldn’t have been able to boost demand as much as it has done lately, according to Dawsey. Hatzius yesterday said the U.S. economy is now growing faster than its potential of 2 percent to 2.5 percent.

(An earlier version of this story was corrected to show Goldman Sachs questioned the ‘new normal’ outlook in 2012 not 2014.)

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net Ben Sills

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