Business Cycle Watch: Bill Gross at PIMCO thinks the Fed Funds rate needs to get to 3.75% or below to be neutral for consumers and moderate the housing crunch. He acknowledges, however, that the global economy complicates the job of central bankers and that such a level of rates would be stimulative for the business sector.
In my mind that is OK. Now that the government sector in the US is running at a basic balance, fiscal policy is now neutral. The political climate does not indicate that the government will increase fiscal stimulus anytime soon. The decline in the dollar is stimulative to exports and the profits of multinationals, but the dollar is now bumping along the bottom of its historical range and policy makers are reluctant to force it lower. Households in the US have been running a deficit, but the end of the housing boom is leading to a retrenchment and a rising savings rate. The one sector of the economy that has leeway to move to a more stimulative posture is the business sector, which has been running a surplus (more cash flow than investment) for most of this decade. An increase in business investment would be just what the doctor ordered.