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Pimco: Fed 'may find it impossible' to escape lower bound of rates

A woman walks past the Federal Reserve headquarters in Washington September 16, 2015. REUTERS/Kevin Lamarque

By Jennifer Ablan

NEW YORK (Reuters) - Bond fund giant Pacific Investment Management Co said on Tuesday the pace of Federal Reserve interest-rate increases is likely to be even more gradual than the firm expected in March and that the U.S. central bank may find it impossible to escape the effective lower bound of policy rates.

Pimco said in its quarterly Cyclical Forum outlook report that it cut its forecast for U.S. economic growth in the next 12 months to between 2.25 percent and 2.75 percent, from 2.5 percent and 3 percent in March.

"In contrast to robust consumption and housing, business investment confronts the headwinds from low oil prices and cutbacks in drilling and exploration, while exports will be challenged by the delayed effects of a stronger dollar and slower growth in emerging economies," Richard Clarida, global strategic advisor, and Andrew Balls, chief investment officer of global fixed-income, wrote in the Pimco outlook report.

Pimco said it expected global economic growth in the next 12 months to remain broadly unchanged from where the Newport Beach, Calif-firm saw them in March, between 2.5 percent and 3 percent with global inflation between 2 percent to 2.5 percent.

Clarida and Balls said although more than 40 central banks have eased monetary policy thus far in 2015, the odds of additional monetary easing by the European Central Bank and the People's Bank of China "are material," and further easing by the Bank of Japan is "certainly possible."

As for the Federal Reserve, while Pimco's baseline view remains that it will commence a rate hike cycle sometime over Pimco's one-year cyclical horizon, the pace of liftoff is likely to be even more gradual than it expected in March.

"Moreover, as our new and already valued colleague Joachim Fels (Pimco's global economic advisor) reminded us, there is a chance that the Fed, like a number of central banks in recent years, may find it impossible to escape the effective lower bound to which policy rates were cut during the dark days of the crisis some seven years ago," Clarida and Balls wrote.

Dan Ivascyn, Group CIO of Pimco, told Reuters on Friday the firm added U.S. Treasuries in various maturities ahead of the Fed's decision not to raise interest rates last week.

That positioning helped its flagship Pimco Total Return Fund post a one-week return ended September 17 of 0.26 percent, surpassing 92 percent of their peers.

(Reporting By Jennifer Ablan; Editing by Chizu Nomiyama)