Tags: Investors | Fed | Easing | qe

FT: Big Investors Bet Fed Will Embark on More Easing

Thursday, 19 April 2012 10:31 AM

While the economy is on the mend, markets shouldn't discount the possibility of the Federal Reserve stepping in with a third round of large-scale bond buybacks from banks to make sure recovery doesn't lose track, big investors say.

The Fed has twice pumped trillions into the economy buying bonds from banks to ensure price stability and encourage hiring, a stimulus tool known as quantitative easing (QE).

Market talk of a third round has come and gone this year, with calls for it growing when economic indicators disappoint and dismissals when indicators surprise.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

Don't rule it out, as in 2010 and in 2011, the country showed signs of recovery earlier only to hit soft patches prompting Fed intervention.

"We believe the Fed stands ready to do whatever you want to call the stimulus when you get a look at potentially negative nominal GDP," says Jeffery Gundlach, head of the DoubleLine Funds, according to the Financial Times.

Others agree.

"It’s not a done deal either way, it’s data dependent," says Carl Eichstaedt, a portfolio manager at Western Asset Management, the FT adds.

"If the data come in weak there’s a higher probability of QE."

If the Fed does roll out a third round of quantitative easing, known widely as QE3, expect stocks to rise.

"If you get another form of QE, the primary benefit will be to risk assets, including equities, high yield or spread assets in fixed income. In addition, you will obviously see a cheapening of the dollar," says Rick Rieder, chief investment officer for fixed income at BlackRock.

Quantitative easing rarely fails to draw opinions.

Supporters say it steers the country away from a deflationary cliff and encourages hiring, while critics say it will fuel inflationary pressures down the road and hasn't lowered unemployment rates to pre-crisis levels.

Other experts agree that economic indicators are not suggesting more sustained recovery, as consumer sentiment numbers have come in spotty as have unemployment figures, with March adding only 120,000 jobs, far below expectations.

The Fed's monetary policy body, the Federal Open Market Committee, will meet later this month to discuss interest rates and whether the economy merits further stimulus.

Some say the Fed is done intervening and will now focus on communicating how they'll transition policy to handle more economic growth.

"They are done with quantitative easing," barring significant further weakness in the economy, Mark Spindel, chief investment officer at Potomac River Capital, a Washington hedge fund that manages $250 million, tells Bloomberg.

"All of the effort is going to be on guidance: What date, how do they describe it, do they want to conditionalize it, do they want to lengthen it or shorten it?"

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

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