Fed May Need to Buy More Assets After QE2, Pimco’s Clarida Says

The Federal Reserve may be forced to buy more assets if the $600 billion in bond purchases announced yesterday isn’t enough to boost growth and inflation, Pacific Investment Management Co.’s Richard Clarida said.

“A year from now, if unemployment is 9, 9.5 or 10 percent, we are going to see more,” Clarida, a global strategic adviser for Pimco, said during on Bloomberg Television’s "InBusiness" with Scarlet Fu. “It may take a different form; it may be concentrated in different assets, but the Fed can’t cut interest rates. They are at zero at the short-end. If they are going to ease policy, they have to do it through these quantitative measures.”

The central bank will buy about $75 billion of Treasuries a month, or $600 billion through June and “will adjust the program as needed,” policy makers said in a statement issued after the conclusion of the Federal Open Market Committee meeting yesterday. They’ve kept the benchmark target rate for overnight loans between banks at a record low range of zero to 0.25 percent since December 2008.

“The Fed has indicated very clearly it has a dual mandate of inflation of 2 percent and a low unemployment rate,” Clarida said. “Right now the Fed has fallen short on both of those mandates. This is potentially not the end of QE, depending on the data.”

U.S. initial jobless claims rose to 457,000 in the week ended Oct. 30 from a revised 437,000 the prior week, Labor Department figures showed today. The median forecast of 50 economists in a Bloomberg News survey was for an increase to 442,000 from a previously reported 434,000.

Preferred Measure

The unemployment rate has been above 9 percent since May 2009. The Fed’s preferred annual measure of inflation was unchanged from the prior month and was up 1.2 percent last month from a year earlier, the smallest gain since September 2001, government figures showed Nov. 1. The so-called core PCE rate tracks the personal consumption expenditures price index excluding food and energy.

Gross domestic product rose at a 2 percent annual rate from July through September, in line with economists’ forecasts, Commerce Department figures showed Oct. 29. The pace was 1.7 percent in the second quarter and 3.7 percent in the first.

“The transmission mechanism from lower rates to more economic growth is an uncertain one and right now it’s not operating as the Fed would like,” Clarida said. “Most economists would have thought that with these low interest rates and the quantitative easing we’ve had, we would have seen more of an impact on job growth and the economy.”

In its first round of purchases, which ended in March, the Fed bought $1.75 trillion in securities, including $300 billion in Treasuries.

“The Fed is much more concerned about a deflationary outcome, falling prices than it is about rising inflation,” Clarida said. “The Fed is hoping that leads to economic growth and lower unemployment. That’s the transmission mechanism that they can’t directly control.”

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