Paul McCulley, managing director of PIMCO, said key short‐term interest 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.” McCulley, who heads PIMCO's short‐term bond desk, spoke before the release of Q2 U.S. GDP data that indicated the nation's worst economic slump in more than 20 years appeared to be bottoming. U.S. GDP contracted a less‐than‐expected 1 percent in Q2, after a 6.4 percent plunge in Q1.
Inflation Not a Problem – Deflation IS THE BIGGEST RISK McCulley said the inflation hawks, concerned about rising U.S. inflation amid record Fed intervention to provide liquidity to credit markets and support institutions whose failure would pose systemic risk, have misplaced their concern. McCulley, in no uncertain terms, reiterates that the biggest risk for the U.S. economy is not inflation, but deflation, stemming from a lack of demand. Deflation ‐ a protracted, systematic decline in prices and wages ‐ occurs in pronounced recessions and other conditions in which demand is weak. Robbing companies of the ability to increase revenue, it handicaps the economy's ability to grow. If it takes hold, deflation can lead to the dreaded 'deflationary spiral,' in which price cuts lead to lower corporate revenue, prompting more lay‐offs, leading to further consumer spending declines, prompting more price cuts, and so on. That has to be avoided, and if it means the Fed won't increase rates until 2011, that's the stance the Fed should take.
FED won’t raise rate until 2011