The Federal Reserve will cap its policy of hiking interest rates with one more quarter-point increase at the end of January, according to Paul McCulley, managing director of Newport Beach-based Pacific Investment Management Co., who was interviewed Tuesday on CNBC.
Talk of a looming economic downturn or recession picked up Tuesday after the yield curve became inverted at several points on Tuesday.
An inverted yield curve means the interest rate on shorter term bonds, such as a two-year note, are higher than rates on longer term bonds, such as the 10-year Treasury.
Analysts say an inversion historically has been a harbinger of an economic slowdown. Investors who have pushed rates on short-term bonds higher are demanding a greater return in the short term because they fear an economic slowdown, analysts say.
The last time the yield curve was inverted was in 2000, before the economy sunk into a recession.
At one point Tuesday, the yield on a 10-year Treasury bond was 4.397%, while the two-year Treasury was yielding 4.411%.
But other analysts say that an inverted yield curve may just be signalling a pause to growth in the U.S. economy, and may actually cause the U.S. dollar to strengthen.
McCulley said on CNBC that investors should have bought bonds when there was “a lot of (rate) tightening and be on the front end of the yield curve.”
On Dec. 13, the Federal Reserve raised the benchmark federal funds rate for a 13th straight time since June 2004 to 4.25%. At the time, Pimco Chief Investment Officer Bill Gross predicted a rate cap of 4.5%.
McCulley said on CNBC that he’s seen less borrowing by consumers against home equity loans as rates have continued to ratchet up.
