Many investors have started to speculate that the Federal Reserve will raise interest rates soon.
Earlier this month, federal funds futures contracts indicated a 70 percent chance that the central bank will increase the fed funds rate to at least 0.5 percent by November.
Poppycock, says Paul McCulley, managing director at powerhouse bond fund manager Pimco, writes on the firm’s web site.
He acknowledges that the Fed will have to raise rates at some point.
“Most rational investors accept the dual proposition that a Fed funds rate pinned against zero and near-$800 billion of excess reserves sloshing around the banking system are not enduringly sustainable,” McCulley writes.
So when will that massive monetary stimulus be reversed?
“Last week, the markets started to romance the notion of before the end of 2009. To me, this is simply silly,” McCulley declares.
“In the matter of cutting off, and then killing, the fat-tail risk of deflationary Armageddon, boldness in execution is no vice, while patience in declaring victory is indeed a virtue.”
“The Fed has been bold and is committed to patience. Bravo! And the first Fed rate hike? Call it no sooner than 2011,” McCulley forecasts.
Backing up McCulley’s view, the Fed may emphasize signs of economic weakness in its Federal Open Market Committee statement June 24 — making it clear a rate increase isn’t coming anytime soon, reported Bloomberg News.
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