A ’’soft patch’’ that is coming in the world’s economy may induce the US Federal Reserve to restrict its hikes, limiting them to only two or three more rises in the six meeting scheduled for this year, predicts Paul McCulley, a managing director at Pacific Investment Management Co.

Pimco manages the largest bond fund in the world. McCulley forecasts the end-of-year Fed funds rate to stand at 3.25 percent to 3.50 percent, as opposed to the average rate of 4 percent, yielded by the Bloomberg News survey of economists. He cites slowdown in employment growth, consumer confidence, retail sales and manufacturing as evidence that the Fed may temper its pace. The last hike on March 22 lifted the Fed funds rate to 2.75 from 2.50.

``The Fed ain’t gonna be hiking in 50 basis point clips,’’ McCulley wrote in a monthly commentary. ``What is more, the Fed probably has only two or three more 25 basis point shots left.’’

The ’’soft patch’’ as presented by McCulley is exemplified in the reduction of growth forecasts by the Organization for Economic Cooperation and Development that indicated in its semi-annual forecast that it plans to lower the prediction for its thirty members to 2.8% in 2005 from 3.3% expected in November last year.
``A global `soft patch’ seems to be emerging, even the hawks of the world must acknowledge,’’ McCulley wrote. ``What if it’s not just a `soft patch’ but a `soft landing?’ In that case, not only will the FOMC not be tightening more aggressively, but will actually stop tightening!’’

In McCulley words, the Fed will try to keep the rates lower to allow for some inflation to save the economy from disinflation later on.

``The most important secular imperative for the FOMC is to have a sufficient `buffer’ in the inflation rate to absorb the disinflationary force of the next recession, without plunging into a world of `unwelcome’ disinflation,’’ McCulley wrote. ``Inflation is simply too low at the moment for either America or the world to absorb a disinflationary shock to aggregate demand, otherwise known as a recession.’’