PIMCO's McCulley: Fed must have bold plan in mind
The U.S. Federal Reserve may need to consider highly unorthodox measures to boost the economy if a "liquidity trap" drags on, said Paul McCulley, managing director of the giant bond firm PIMCO.
In a newsletter posted on Tuesday, McCulley said the Fed should have a plan in mind "if and when" the U.S. economy seemed set to languish in a way similar to Japan's so-called "lost decade." of the 1990s.
Liquidity trap is a term used to describe a situation where a country's nominal interest rate has been lowered to, or close to, zero but still fails to stimulate the economy.
The Fed has set its benchmark lending rate in a range of zero to 0.25 percent since December 2008.
For now, pressure on personal income continues from "massive unemployment and underemployment," which is pushing wage growth toward zero, McCulley said.
"This is not the stuff of a self-sustaining revival in aggregate demand," he added.
"America is in a liquidity trap, driven by private sector deleveraging borne of asset price deflation, meaning that private sector demand for credit is axiomatically flat to negative, despite a fed funds rate pinned against zero.">>>MORE