Tags: Gross | Fed | Asset Bubbles

Pimco’s Gross: Fed Tactics Will Cause Asset Bubbles, Do Nothing for Growth

Monday, 01 Oct 2012 08:24 AM

The Federal Reserve's decision to roll out a third round of asset purchases from banks, a monetary stimulus tool known as quantitative easing, will fuel asset bubbles and do little for growth, said Bill Gross, founder of Pimco, manager of the world's largest bond fund.

The Fed recently announced plans to buy $40 billion worth of mortgage-backed securities from banks a month on an open-ended basis, the third such round of quantitative easing since the 2008 financial crisis.

Prior rounds of quantitative easing saw the Fed inject a combined $2.3 trillion into the economy, and this third round, while open-ended, could see money authorities pump $1 trillion in fresh, inflation-fueling liquidity into the economy, according to some estimates.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

The move would weaken the dollar and send stock prices rising by design, so expect investors to chase assets in search of yield in such a way that asset bubbles will swell, especially since the European Central Bank (ECB) has unveiled similar measures.

"Fed will write $1trillion or more checks in nxt 12 mons/ECB wl write same. Reflation ahed," Gross wrote on his Twitter account, referring to reflation, the act of sending prices rising in an effort to juice the economy. "Will create asset bubbles but little growth," Gross added.

Quantitative easing works by injecting liquidity into the economy in a way that pushes interest rates down to encourage investing and hiring.

Critics say the move will bring little improvement to the economy and labor market since interest rates are low enough as it is, adding fiscal reform is needed for more sustained recovery.

Congress, however, has been unwilling to address many tax and spending issues in an election year, leaving the Fed the only player in the game doing what it can to prop up the economy.

Despite all the side effects that come with quantitative easing, Fed action is better than no action, other market watchers say.

“In general, if you don’t like what the Fed is doing, then you have to come up with an alternative plan,” said Richard Jerram, chief economist at Bank of Singapore, according to CNBC.

“It seems that they (the critics of Fed policy) are fairly short of alternatives at the moment.”

Others agree.

“I would prefer they did something rather than nothing and an asset bubble may be a small price to pay for that,” said Nizam Idris, managing director, head of strategy for fixed income and currencies at Macquarie Bank in Singapore, CNBC added.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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The Federal Reserve's decision to roll out a third round of asset purchases from banks, a monetary stimulus tool known as quantitative easing, will fuel asset bubbles and do little for growth, said Bill Gross, founder of Pimco, manager of the world's largest bond fund.
Gross,Fed,Asset Bubbles
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2012-24-01
 

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