Although McCully's benign economic theories are as bogus as the Wizards, I think he has nailed (and commercials are signaling) what the Wizards will actually do in the next few months: talk a lot and fall further behind the curve. What they should do is raise 50 bps on Feb. as descibed by CI.:
Pimco´s McCulley sees Fed stopping at 2.5% or 3%
Tuesday, January 25, 2005 10:40:18 PM
afxpress.com
The Federal Reserve will be conservative with interest-rate hikes over the coming months, Paul McCulley, managing director at leading bond firm Pacific Investment Management Co., predicted Tuesday
"I think the Fed will stop between 2.5 percent and 3 percent," McCulley said in a speech to the Investment Analysts Society of Chicago. The Fed "is not trying to shut this economy down," added McCulley, one of the top decision makers at Newport Beach, Calif.-based Pimco, the largest bond-fund firm as measured by assets under management
The U.S. central bank's current interest-rate target stands at 2.25 percent after five rate increases last year. Its rate-setting panel next gathers on Feb. 2 and is widely expected to lift the target to 2.5 percent then
Futures contracts show interest-rate hedgers think the Fed will be more aggressive this year. Contracts are priced to reflect bets the Fed's rate could stand at 3 percent as soon as May, with around a 50-50 chance of yet another quarter-point rate increase in June.
McCulley said the Fed is well-aware that adequate global liquidity has been key to offsetting what he sees as global investor acceptance of "skinny risk premiums that smell of irrational exuberance." Yet global liquidity would only suddenly dry up due to a "policy mistake among central banks ... led by the Federal Reserve," he said
With valuations perhaps unsustainably high, McCulley looks for Fed Chairman Alan Greenspan in the next weeks or months to "scare the daylights out of us," he said, with a warning that investment risk doesn't jibe with global economic growth fundamentals.
McCulley sees longer-term risk in the global trade imbalance that has driven the U.S. deficit to its largest share of gross domestic product ever. The United States consumes more than it produces, saves little relative to the rest of the world and relies on foreigners to buy government debt. But Asian economies in particular are likely to become bigger consumers themselves.
"I see a bout of stagflation coming as our day of reckoning [nears] ... but it's not an imminent risk," McCulley said. He added that stagflation in the U.S. economy would comprise inflation taking up a majority of nominal GDP
The United States is expected to report on Friday that fourth-quarter GDP slowed to around 3.6 percent. The report's personal-consumption expenditure deflator -- a measure of inflation known to be Greenspan's favorite -- is currently around 1.5 percent on an annualized basis.
McCulley said he sees that measure rising to 3.4 percent in the years ahead. But he said the global economy is far from the brink of a repeat of 1970s inflation
Even as the United States struggles with deficits, according to McCulley, the euro is not positioned to take over as a lone global reserve currency because the European common currency is backed only by a monetary union rather than a political union
"Europe," he said, "is not ready to be a substitute for the dollar." This story was supplied by MarketWatch. For further information see www.marketwatch.com |
