Hedge fund heavyweight George Soros, chairman of Soros Fund Management, says interest rates probably will jump this year as the economy gains momentum.
That momentum will come courtesy of the Federal Reserve, which is doing the right thing in its massive easing program, Soros told CNBC.
“You need to re-establish growth for shrinking the debt,” he said. “And so, I think the policy pioneered by [Fed Chairman Ben] Bernanke is actually the right policy.”
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The central bank is buying $85 billion of Treasurys and mortgage-backed securities a month. In addition, the Fed plans to keep the federal funds rate at zero to 0.25 percent until unemployment drops to 6.5 percent.
But the strategy carries significant risk, he acknowledged. “Once the economy gets going, then interest rates are going to take a big leap,” Soros said. GDP expanded at a 3.1 percent rate in the third quarter, and economists expect it to grow about 2 percent this year.
Ultimately, the Fed will reverse its easing, he says.
“This is a delicate, two-phase maneuver, where first, you throw more money at the economy,” Soros said. “And as the economy picks up, you have to take that money out. And as you take it out and interest rates shoot up, that is liable to arrest the recovery.”
So when will the rise in rates come?
“As soon as there are clear signs of pick up in the economy,” Soros said. “It may already have begun, actually. It shows some signs. I think it's most likely to happen this year, once you are past the uncertainty about the budget.”
The 10-year Treasury yield stood at 1.85 percent late Thursday, up from a record low of 1.38 percent in July.
As for Europe, Soros, who warned in the past that the euro’s days might be numbered, now says the currency’s survival is assured. “Germany has done what was necessary to make it clear the euro is here to stay,” he said.
“That has been a tremendous relief for the markets. . . . There's a general sense of almost euphoria.”
But that’s taking it too far, Soros said. “The fundamental internal inconsistencies in the system have not been addressed. ... And therefore, you face political dangers.”
Soros said he doesn’t expect those dangers to go away. “I think, is going to get worse. I think the next year – the next two years, perhaps – are going to be very touchy. If the European Union survives that, then it may last for a long time, but not forever.”
Soros thinks the biggest danger may be a currency war. He’s not alone in that. But despite all the fear, currencies haven’t declined in most of the countries where central banks are easing.
The lack of inflation is a major reason for that. “If you don't have inflation then you haven't diluted the value of the currency," Elsa Lignos, currency strategist at RBC Capital Markets, told The Wall Street Journal.
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