Lead Left Interview – Mickey Levy (Part 2)

This week we continue our conversation with Mickey D. Levy, chief economist for US and Asia, Berenberg Capital Markets. Mickey is a long-standing member of the Shadow Open Market Committee and conducts research on a wide range of global economic, financial and policy issues.  Second of two parts – View part one

TLL: The Fed seems poised to raise rates in December. Does the election change the pace of their hiking?

ML: Yes, I expect the Fed will raise rates 25 basis points in December.  In 2017, the Fed can be expected to raise rates moderately faster than earlier anticipated if enactment of pro-growth fiscal policy generates stronger growth.  Even before the election, Federal Reserve Vice Chairman Stanley Fischer spoke about the Fed’s estimates of how fiscal stimulus –either tax cuts or spending increases–would raise real interest rates.  Keep in mind the real Federal funds rate remains negative and the Fed’s balance sheet is bloated with $4.5 trillion in assets even though the Fed has achieved its employment objective and inflation is close to the Fed’s long-run inflation target.  So monetary policy will remain accommodative even as the Fed raises rates.  Also, if the economic growth picks up in response to a shift in fiscal policy, the Fed would also be on heightened alert for signs of higher inflation, which would elicit faster rate increases. 

TLL: Last November you thought we were in the bottom of the 5th in terms of the economic cycle. Where are we today?

ML:  I think we’re in the 7th inning, but well-designed tax reform and deregulation could add new life into the economic expansion.  I have been worried about the slow growth and particularly the disappointing growth in business investment despite the Fed’s successful efforts to lower bond yields and the real costs of capital, and the associated weak productivity growth.  Jump-starting business investment and easing up on some of the burdensome regulations on labor mobility are critical to lifting potential growth.  And infrastructure improvement and expansion–if executed properly–could also add jobs and add to economic efficiencies.