Fed_Pimco PhotoSt. Louis Federal Reserve President James Bullard and Josh Thimons of Pacific Investment Management Company (Pimco), the world’s largest fixed income fund gave their economic forecasts recently.  They actually agree.

According to James Bullard, speaking Monday at  the 19th Annual Conference of the International Economic Forum of the Americas in Montreal, low U.S. inflation has been a surprise. That means that the central bank can continue to “pursue its aggressive asset purchase program,” Bullard said. But he was careful not to say that the central bank would do so, just that it could without too much worry about inflation.

This fell on the heels of Pimco’s announcement last week that it expects the Federal Reserve will probably refrain from selling assets from its balance sheet over the next three to five years, as the U.S. falls short of a return to full employment.

Josh Thimons said Pimco expects the U.S. economy to grow in a range of 1.5% to 2.5% per year over the next three to five years. While the economy will benefit from such “pockets of strength”, it will be held back by an “unsustainable fiscal situation,” he said.

Thimons said, as the expansion continues in the coming years, the Fed will begin to raise interest rates in a move toward “policy normalization,”. The central bank’s target for federal funds rate, that is the interest rate that commercial banks charge each other for overnight loans, currently stands at near zero. The Fed’s balance sheet though will “likely remain elevated for years to come as the proactive sale of assets is unlikely” for the next three to five years, Thimons added.

Back in Montreal Bullard said, “Labor market conditions have improved since last summer, suggesting the Federal Open Market Committee (FOMC) could slow the pace of purchases, but surprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame.”  Currently the central bank is running at about $85 billion in bond purchases (aka debt) each month in an effort to shore up employment. The purchases have expanded the Fed assets to about $3.4 trillion as it considers paring down.

Bullard also asserted that the Fed has its eye on irrational exuberance among investors “An important concern for the FOMC is that low interest rates can be associated with excessive risk-taking in financial markets,” Bullard said. “So far, it appears that this type of activity has been limited since the end of the recession in 2009.”

The Newport Beach, California-based Pimco said it is shying away from risky investment because it sees a growing disconnect between the performances of financial markets and the global economy.  Thimons said the U.S. economy is “much further along the road to repair” than other developed nations. As such, the dollar may strengthen in the longer term against currencies of other industrial nations, though it will probably also weaken against those of faster growing emerging markets, he said.

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