Tags: Gross | goldman | fed | easing

Pimco's Gross, Goldman's Hatzius See More Fed Easing on Horizon

Wednesday, 09 May 2012 10:28 AM

Bill Gross at Pacific Investment Management Co. and Jan Hatzius at Goldman Sachs Group Inc. say investors should prepare for additional bond purchases by the Federal Reserve, known as QE3, to combat a slowing U.S. economy.

A decision to buy more debt is “getting closer,” Gross, who runs the world’s largest mutual fund, wrote on Twitter. Hatzius, the chief economist at New York-based Goldman Sachs, predicted in a report that the Fed will announce additional monetary easing when it meets in June.

Prospects for central bank asset purchases increased after a Labor Department report May 4 showed U.S. employers added 115,000 jobs in April, the smallest gain in six months. Europe’s debt crisis is threatening to slow global growth. Ten-year Treasury yields fell to 1.81 percent, approaching the record low of 1.67 percent set Sept. 23.

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

“In such an uncertain environment, taking out a bit more insurance still looks like the sensible choice for U.S. monetary policy makers,” Hatzius wrote. “We have stuck with our forecast of some additional monetary easing” at the Fed’s policy meeting June 19 to June 20.

Bond Purchases

The central bank bought $2.3 trillion of bonds in two rounds of so-called quantitative easing, known as QE1 and QE2, from December 2008 to June 2011. The Fed is also replacing $400 billion of short-term Treasurys in its holdings with longer-term debt to keep borrowing costs down, under a program scheduled to end next month.

Policy makers have pledged to keep the target for overnight bank lending as low as zero until at least late 2014.

Two Fed officials have questioned whether additional easing will work.

Fed Bank of Dallas President Richard Fisher said that a drop in equity prices is no reason for the central bank to intervene.

“Markets are manic depressive, they come and go,” Fisher told reporters when asked if slumping markets and slower-than-expected employment gains had changed his outlook for Fed policy. “The key to success here is not further monetary accommodation.”

Shares Slumping

The Standard & Poor’s 500 Index fell to its lowest level in two months Tuesday.

Fed Bank of Richmond President Jeffrey Lacker said May 7 that much of U.S. unemployment results from structural weaknesses such as inadequate training that can’t be fixed by Fed stimulus. The U.S. jobless rate of 8.1 percent is the lowest in three years.

“Some commentators are urging the Fed to take additional action as long as the unemployment rate remains elevated,” Lacker said. “But if elevated unemployment reflects largely fundamental factors rather than insufficient spending, such stimulus might have little impact on unemployment and instead just raise the risk of pushing inflation up.”

Lacker votes on monetary policy this year while Fisher does not.

The U.S. economy is “dreary,” Hatzius wrote.

Gross domestic product slowed to an annual rate of 2.2 percent in the first quarter from 3 percent in the prior three months, the Commerce Department reported April 27.

Greece Struggling

Politicians in Greece struggled to form a new government, raising concern the nation will abandon the euro as its currency.

Benchmark 10-year Treasury notes yielded 1.83 percent today as of 11:01 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The average over the past decade is 3.83 percent. The 2 percent security due in February 2022 changed hands at 101 15/32.

Low government rates have led investors to look for more attractive yields outside the sovereign bond market.

Treasurys have returned 0.6 percent this year, eclipsed by a 4.8 percent rally for an index of U.S. investment grade and high-yield company debt, according to Bank of America Merrill Lynch data.

“Risk markets need more ammo if they are to stay up,” Gross, who is based in Newport Beach, California, wrote on Twitter.

Gross’ Total Return Fund has returned 4.8 percent this year, beating 98 percent of its peers, according to data compiled by Bloomberg. Pimco is a unit of the Munich-based insurer Allianz SE.

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


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