Paul McCulley on the future of loose monetary policy

Just as I posted yesterday my “US stocks in a win-win situation” and today Paul McCulley, Pimco’s Chief Economist, was reported expressing essentially the same idea, that the Fed will keep loose monetary policy for as long as it takes for the US economy to pick up enough momentum.

Mr McCulley is operating in the bond market and advises clients to buy inflation-potected government bonds (TIPS). This however should not be understood as a prediction of a runaway inflation. His advice reflects merely the fact that bonds, because of their low yields and fixed coupon payments, are more vulnerable to inflation.

Incidentally, bonds are more vulnerable to rate hikes as well. While historically there were times when stocks were rising even as interest rates were going up, the inverse relation of rate hikes and falling bond prices are practically inevitable. McCulley’s opinion should therefore not be seen as negative for stocks.

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