PIMCO’s McCulley: How The New Neutral Boosts Stock Prices

Shortly after PIMCO re-hired Paul McCulley as chief economist, Bill Gross revealed that he and McCulley had independently come to essentially the same conclusions about the New Neutral paradigm shaping the bond market. In his first article since returning, McCulley explains the New Neutral from his perspective, but he takes us back thirty-five years to do so.

The New Neutral: Volcker’s war on inflation

In 1979 Federal Reserve Chairman Paul Volcker declared a secular war on inflation using cyclical policy tools in what was called opportunistic disinflation. The idea was that recessions would inevitably happen from time to time, bringing inflation down with them, and the Fed would fight to prevent inflation from coming back when the economy recovered.

“A corollary of...