Pimco's McCulley Says Odds of More Fed Easing Drop After Payrolls Report
Pacific Investment Management Co.’s Paul McCulley said the larger-than-forecast increase in private jobs in August lowers the odds that the Federal Reserve will seek more quantitative easing at this month’s policy meeting.
“The Fed can breathe a little bit easier,” McCulley, a portfolio manager and partner at the world’s biggest manager of bond funds, said during an “In the Loop” interview on Bloomberg Television with Betty Liu. There is “no compelling pressure to move to QE2.”
Treasuries rallied and stocks fell after the Fed announced Aug. 10 that it would reinvest principal payments on its mortgage holdings into long-term U.S. debt securities, adding to speculation policy makers would expand purchases in a policy known as quantitative easing if the economy showed more signs of weakening. The central bank bought $1.7 trillion of Treasuries and mortgage agency debt last year.
“I don’t think it rules out QE2 at the upcoming meeting,” said McCulley. “But it lowers the odds for that. They need to have pretty compelling evidence that the economy is slipping, and the economy seems to be muddling along right now. It reduces the urgency of the Fed doing something.”
Private payrolls that exclude government agencies climbed 67,000, after a revised 107,000 increase in July that was more than initially estimated, Labor Department figures showed today. The median estimate of economists surveyed by Bloomberg News called for a gain of 40,000. Overall employment fell 54,000 for a second month and the unemployment rate rose to 9.6 percent as more people entered the labor force.
No Bear Market
Treasuries dropped after the jobs report, with the yield on the 10-year note rising 7 basis points, or 0.07 percentage point, to 2.69 percent at 10:33 a.m. in New York. The yield touched a 19-month low of 2.4158 percent on Aug. 25.
“I don’t think we have a big bear market in front of us for the simple reason the Fed is going to be pinned near zero for an exceedingly long time and inflation is low and likely to go lower,” McCulley said from Pimco’s headquarters in Newport Beach, California. He also expects stocks to be little changed near current levels.
The Fed has kept its target rate for overnight loans between banks at a record low range of zero to 0.25 percent since December 2008. Policy makers next meet Sept. 21.
‘New Normal’
Pimco has called for a “new normal” in the global economy that will include heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy. U.S. growth rates will slow to around 2 percent over the next several years, according to the firm.
Ten-year notes’ prices tumbled the most since June 2009 on Aug. 27 after Fed Chairman Ben S. Bernanke said the central bank will provide additional stimulus as needed during remarks to central banks at a symposium in Jackson Hole, Wyoming.
The 10-year note yield will climb to 3 percent by year-end, according to the average forecast in a Bloomberg News survey of banks and securities companies, with the most recent estimates given the heaviest weightings.
Pimco, which managed more than $1.1 trillion of assets as of June 30, according to its website, is a unit of the Munich- based insurer Allianz SE. Pimco runs the $247 billion Total Return Fund, the world’s largest bond fund.
To contact the reporter on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net
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