Fed Won’t Raise Rate Till 2011, Pimco’s McCulley Says

By Candice Zachariahs

Aug. 2 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke won’t raise borrowing costs before 2011 as the threat of deflation remains for the U.S., said Pacific Investment Management Co., which runs the world’s largest bond fund.

Benchmark rates will not rise “before 2011 and I’m not only forecasting that as a professional forecaster, but positioning portfolios on that proposition as well,” said Paul McCulley, 52, managing director at Pimco, in an interview that was broadcast by the Australian Broadcasting Corp. today, and taped earlier in the week. “What I’m worried most about is simply a shortfall in global aggregate demand relative to supply potential.”

U.S. economic growth will be closer to 3 percent than the range of 5 percent to 7 percent for the past 15 years, Bill Gross, who runs Pimco’s Total Return Fund, said in his August investment outlook last week. The U.S. economy will begin to recover in the second half of 2009, he wrote on Pimco’s Web site.

Gross’s $161 billion Total Return Fund returned 12 percent in the past year, beating 96 percent of its peers, according to data compiled by Bloomberg. Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.

The interview with McCulley was recorded before the release July 31 of a government report showing that the worst U.S. economic slump since the Great Depression abated in the second quarter.

GDP Contracting

Gross domestic product shrank at a better-than-forecast 1 percent annual pace after a 6.4 percent drop the prior three months, Commerce Department figures showed in Washington.

“Assuming that the recovery continues the way it’s been going and there’s no further hiccups, I think they might start to remove some of the monetary policy stimulus towards the end of next year,” said Besa Deda, chief economist at St. George Bank Ltd. in Sydney. “It will be a slow and gradual recovery and the Federal Reserve won’t want to tread on that, so I wouldn’t rule out a hike occurring in 2011.”

McCulley said he was concerned about a protectionist backlash, downward pressure on wages and nationalism replacing global cooperation in monetary and fiscal affairs. [yep, countries circling their wagons to protect there own economies]

“It’s difficult to see where private sector aggregate demand is going to come through as the world is delevering and trying to increase its savings rate,” McCulley said. “A global economy that is chronically operating under its potential with idle resources, that creates social implications that are unjust and at worst destabilizing.”

McCulley heads Pimco’s short-term bond desk. He joined Pimco in 1999 from UBS Warburg, where he was the chief economist for the Americas.

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