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Gross: Fed to Keep Interest Rates Low for a Long Time

Thursday, 14 Jul 2011 08:29 AM

Markets are buzzing about whether the Federal Reserve will unveil fresh stimulus measures designed to prop up the economy, but whatever happens, interest rates are likely to stay low for years to come, says Bill Gross, co-head of Pimco, the world's largest bond fund.

"I think that what Bernanke should explain in terms of this language is that it's really going to be a long, long time from which the Fed deserts its 25-basis-point Fed Funds target," Gross tells CNBC, referring to Fed Chairman Ben Bernanke.

"And that to me means several years as opposed to several quarters or several months."

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Bill Gross
(Pimco photo)
The Federal Reserve's benchmark lending rates stand at 0.25 percent, or very low, which is designed to make lending more attractive and fuel more robust economic growth.

The Fed recently wrapped up a second round of quantitative easing, policy under which the Fed buys assets held by banks in order to pump those institutions full of money so they'll invest and get the economy going again.

The Fed meets regularly to vote on interest rates, and release the minutes of those meetings afterwards.

The minutes from the most recent meeting suggest one group within the Fed's voting members favor further easing measures, others might not.

In all likelihood, Gross says, the Fed could carry out further expansionary monetary policies without necessarily calling it as such.

"Additional purchases would be very difficult, politically and within the context of the divided Fed itself. But what the Fed can do simply through language is 'guarantee' that the Fed Funds rate will not move up from 25 basis points and what that does over a longer period of time is simply lower yields or keep them low."

"In an extended form basically this language does the same thing."

Quantitative easing may fuel stock-market gains, but they also threaten to push up inflation since they involved pumping massive amounts of dollars into the economy.

Some say, however, that the economy can handle a third round of easing, widely referred to as QE3.

"I don’t see any argument against QE3," says Bradford DeLong of the University of California at Berkeley, according to Bloomberg.

"The worry is always that it will destabilize inflation expectations, that they'll lose their anchor, and yet when you look out as far as you can at the prices of the TIPS and of the 30-year Treasuries, you see no sign at all that there’s been any loss of confidence that the Fed will keep inflation under control."

Bernanke has repeatedly said temporary factors, such as high food and gas prices, are slowing the economy but in the long run, things will improve.

He has, however, left open the possibility that fresh easing has not been ruled out.

"The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support," Bernanke tells the House Financial Services Committee on the first of two days of Capitol Hill testimony, according to the Associated Press.

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Markets are buzzing about whether the Federal Reserve will unveil fresh stimulus measures designed to prop up the economy, but whatever happens, interest rates are likely to stay low for years to come, says Bill Gross, co-head of Pimco, the world's largest bond fund. I...
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Thursday, 14 Jul 2011 08:29 AM
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