Tags: Pimco | Gross | Markets | fed

Pimco's Gross: Fed's 'Masterful' Silent Treatment to Keep Markets Calm

Wednesday, 29 Aug 2012 12:35 PM

Don't expect markets to move much from now until the end of the year because the Federal Reserve's "masterful" silent treatment has done what it aimed to do — suppress volatility, said Pacific Investment Management Co.’s Bill Gross.

For months, weak economic indicators have fueled talk the Fed will intervene with a round of asset purchases from banks, a monetary-stimulus tool known as quantitative easing that sends stocks rising and the dollar weakening to fuel recovery and encourage hiring.

Fed officials, however, have said such tools remain on the table but haven't offered any real hints as to whether specific plans to move were under way.

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

As a result, stock and bond markets have remained calm as investors played guessing games, and that's exactly what the Fed had in mind all along.

“What the Fed has done, rather masterfully, in terms of asset markets, is to suppress volatility,” Gross told CNBC.

Stock, bond and gold prices will stay where they are even if the Fed does move in with stimulus measures, as the markets will have long priced in monetary intervention by now.

Expect the yield on the benchmark 10-year note to hover around current levels of 1.65 percent.

“That sounds rather boring and non-committal,” said Gross, manager of the world’s largest bond fund at Newport Beach, Calif.-based Pimco. “But that’s basically what the Fed wants. They want things to stay exactly where they are.”

Some Fed officials recognize that more intervention needs careful consideration.

The Fed has already swollen its balance sheet by trillions of dollar via past quantitative easing rounds, while inflationary pressures may arise with further action.

Furthermore, the tool works in part by suppressing long-term interest rates down, though borrowing costs are already at rock-bottom levels across the board.

"There are benefits to further monetary policy actions, but we have to be realistic about what those benefits will be, how large those benefits will be, and how other factors will help or hinder the effectiveness of those benefits," said Cleveland Fed President Sandra Pianalto, according to Reuters.

"We remain in a frustratingly slow economic recovery."

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

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