A happy economy is one which has a sustainably low level of misery. The misery index, which is the addition of the inflation rate (8.3%) and unemployment rate (3.6%), currently stands at 11.9%, 4.9 points above the level and composition that the general public would consider desirable, 2% for inflation and 5.0% for the unemployment rate being optimal. There is theoretical validity and empirical evidence that, in order to have and keep this ratio in a happy medium, economic growth, expressed in real terms, must run at a 2% annual rate. While not inflexible, in order to achieve this objective in a sustainable manner, two important things must be always kept in sync. Firstly, the Fed’s policy rate (1.00%) must be close to what is an acceptable neutral rate, which is estimated to be the yield on 5-year-treasuries (2.75%). Secondly, the yield curve, which is the difference between 10-year and 2-year Treasuries, must always be moderately positive: 50 bps is a number that can withstand strong headwinds.
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By Hubert Marleau
By Hubert Marleau