Pimco’s Bill Gross said the Federal Reserve next week could signal that interest rates could be capped if warranted due to soft economic growth.
The world's largest bond fund manager said on Twitter late Tuesday: "QE3 likely to take form of 'extended period' language or interest rate caps on 2-3-year Treasurys."
Gross, the co-chief investment officer of Pimco, the world's top bond manager, also said on Twitter: "Next week's Fed statement will likely stress 'extended period of time' language or even a period of interest rate caps."
The Fed will hold its next policy meeting on Tuesday and Wednesday, and will issue its policy statement after the close of the meeting.
The recent soft patch of economic data has increased speculation over whether U.S. policymakers will perform a third round of bond purchases, an unconventional monetary measure known as "quantitative easing," or QE2. The second round of QE2's $600 billion in purchases will conclude on June 30.
But Gross tweeted that the Fed could signal a cap on interest rates as a form of QE3.
Mark Porterfield, spokesman for Pimco, confirmed to Reuters the content of the tweets. Pacific Investment Management Co. oversees more than $1.2 trillion in assets.
While the 10-year Treasury bond is one of the most widely watched securities as it sets the benchmark for almost every other interest rate in the U.S. economy, Fed Chairman Ben Bernanke has long considered the two-year Treasury note as an effective tool.
In a November 2002 speech, entitled "Deflation: Making Sure 'It' Doesn't Happen Here," Bernanke said: "Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time — if it were credible — would induce a decline in longer-term rates."
Bernanke, who at the time was a Federal Reserve governor, went on to say that the two-year Treasury note is a long-term maturity and that 10-year notes are "longer" maturing securities.
Bernanke said: "A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years).
"The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well."
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