PIMCO Managing Director Paul McCulley sees the need for the Federal Reserve to lower the 5.25% fed funds rate by a total 100 basis points in the coming months to deal with the mortgage-sector crisis. Former Fed Chairman Alan Greenspan is an adviser to PIMCO, where Mr. McCulley heads the short-term desk.
Mr. McCulley told institutional investors in a conference call today that he sees the possibility of a 50-basis-point cut in the overnight interbank lending rate at the next Federal Open Market Committee meeting on Sept. 18, if you know you have to do 100 points at least.
Presiding over a recession when inflation is in your comfort zone would be a sin for a central banker. (Fed Chairman Ben) Bernanke does not plan to be a sinner, added Mr. McCulley, who described the current financial markets turmoil as the second act in a three-act play with five players: the housing market, the housing finance market, the non-bank financing system, the rating agencies and the Federal Reserve.
He added that the crisis could not have happened without the implicit and explicit blessing of the rating agencies, while Fed officials were guilty of complicity as they stood by and watched the play, and that effectively made them part of the play.