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Stiglitz says Fed should wait as Treasury yield calls are cut

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(Bloomberg) — Joseph Stiglitz, the Nobel-prize-winning economist, said the Federal Reserve should hold interest rates unchanged through 2015 to support the U.S. economy. A slower pace of rate increases seems to be a view shared by analysts, who are cutting their forecasts for Treasury yields.

“America’s recovery is anemic,” Stiglitz said in a Bloomberg interview Thursday at the World Bank and International Monetary Fund meeting in Lima. On the question of whether the Fed will move this year, he said, “I hope not.”

Treasuries have been the main beneficiaries as signs of slowing growth and ebbing inflation led investors to push back estimates of when the Fed will raise rates. Analysts surveyed by Bloomberg don’t see 10-year note yields rising above 3 percent until the first quarter of 2017, compared with a forecast in April that saw the yield climbing to 3.22 percent by the end of 2016.

Treasury 10-year note yields rose two basis points, or 0.02 percentage point, to 2.12 percent as of 9:03 a.m. New York time, according to Bloomberg Bond Trader data. The price of the benchmark 2 percent security due in August 2025 was 98 29/32.

Treasuries are beating an index of global stocks for a second year on demand for safety. The U.S. government securities returned 1.6 percent this year through Thursday, while investors in the MSCI All CountryWorld Index of shares have lost 1.1 percent including reinvested interest, according to data compiled by Bloomberg. In 2014, U.S. government bonds earned 6.2 percent, while the stock index gained 4.8 percent.

China Factor

Fed officials put off an interest-rate increase in September because of growing risks, mainly from China, to their outlook for economic growth and inflation even as they continued to say they were on track to raise the target later this year, the minutes of their latest meeting issued Thursday showed.

“If the global risks are so important for the Fed, an interest-rate hike is not in the cards this year,” said Birgit Figge, a fixed-income strategist at DZ Bank AG in Frankfurt. “This is the most important reason for revising the Treasury yield forecast. Another thing is the low inflation rate. With import prices in negative territory I do not see any price pressure.”

DZ Bank forecasts 10-year yields rising to 2.35 percent in three months and 3 percent by the end of 2016, although this last forecast “looks very ambitious” at the moment, Figge said.

The odds of a shift by the Fed’s January meeting are less than 50 percent, rising to 61 percent for the March policy session, futures contracts indicate. A month ago, the figures showed investors were preparing for a move this year. The calculations are based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff, versus the current target range of zero to 0.25 percent.

Yoshiyuki Suzuki, the head of fixed income at Fukoku Mutual Life Insurance Co. in Tokyo, said he’s cutting his yield forecast. Ten-year yields will be in a range of 1.9 percent to 2.3 percent through Dec. 31, Suzuki said, dropping his call for the figure to rise past 2.5 percent. “Some delay is possible” as the Fed prepares to shift rates, he said.


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