Tags: Pimco | Gross | Easing | fed

Pimco’s Gross: More Easing Still Possible Despite Fed Talk

Wednesday, 04 April 2012 11:53 AM

The Federal Reserve hasn't given up on stimulating the economy via easing measures despite Fed talk of favoring more hands-off approach to the economy, says Bill Gross, founder of Pimco, manager of the world's largest bond fund.

Easing measures, which call for massive liquidity injections into the financial sector to steer it away from deflationary decline and more towards investing and hiring, have propped up the economy and markets since the recovery began.

Take that support away, and down go stocks and the economy weakens.

Editor's Note: Study: Bernanke Intentionally Devalued the Dollar

"Is the Fed trapped in providing liquidity, cheap liquidity, to pump up stock markets and risk markets? I think they are," Gross tells CNBC.

"They have to keep going if they expect equity markets to lie at this level."

The Fed injects liquidity into the economy normally by buying assets like Treasury bonds and mortgage-backed securities from banks, with inflation a likely side effect.

Critics say when the Fed rolls out such a move, technically known as quantitative easing, it means the central bank is more worried about preventing the economy from falling off a cliff than it is with living up to its mandate of controlling inflation.

The Fed hinted such a move was growing increasingly unlikely in the minutes of its most recent monetary policy meeting, with only a few voting members favoring considering the policy and only if inflation rates reverse course and fall.

"A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run," the Fed said in its minutes.

However, a couple of those members are likely very influential, including Fed Chairman Ben Bernanke himself, Vice Chair of the Board of Governors Janet Yellen and head of the Federal Reserve Bank of New York William Dudley, Gross says.

"I think we should think of the Fed as a chess game with some of the pieces more important than others and Bernanke, obviously, is the king, Yellen is the queen and maybe Bill Dudley is the castle and the others are basically knights," Gross says.

Since the downturn, the Fed has rolled out two rounds of quantitative easing, known widely as QE1 and QE2, injecting $2.3 trillion into the economy in the process.

That's why stocks have risen like they have, Gross says, not on improving fundamentals.

Stock markets plummeted on the news that the Fed is holding off, as liquidity injections often pump up stock prices.

Even Fed hints of such measures rumbles across stock exchanges worldwide in the past.

"The market still seems somewhat addicted to central bank assistance which makes me think that this crisis still has a long way to go," says Gary Jenkins, managing director of Swordfish Research, according to the Associated Press.

Editor's Note: Study: Bernanke Intentionally Devalued the Dollar

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