Pimco’s Gross Says Fed May ‘Hint’ at QE3 to Cap Rates

PIMCO's Bill Gross
Bill Gross, co-chief investment officer of Pacific Investment Management Co. Photographer: Scott Eells/Bloomberg

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said in a Twitter posting that the Federal Reserve may hint in August of plans for additional monetary stimulus.

“Next Jackson Hole in August will likely hint at QE3/interest rate caps,” he wrote referring to the Fed’s annual symposium in Jackson Hole, Wyoming, in a 10:24 a.m. message.

The use of yield ceilings has precedent. The Fed maintained a limit of 2.5 percent on long-term Treasury bonds in the 1940s for almost a decade. In 2002, then Fed Governor Ben S. Bernanke, in a speech to the National Economics Club in Washington entitled, “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” said he preferred the tool as a means of lowering long-term rates.

Bernanke said last year at the Fed gathering in Wyoming that “additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions,” hinting of an upcoming second round of quantitative easing. The Fed began a program of $600 billion in Treasury purchases in November that ends this month.

Gross said during a June 3 interview on Bloomberg Radio that “we don’t see a QE3,” referring to the policy that’s become known as quantitative easing. He added that given the current pace of growth and inflation the Fed “will speak to a fed funds rate that persists for an extended period of time, which in effect caps interest rates in the process.”

‘Moderate Pace’

Fed officials said they will maintain record monetary stimulus to support a flagging economic recovery after completing the bond-purchase program as scheduled.

“The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings,” the Federal Open Market Committee said today in a statement after a two-day meeting in Washington. “The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee had expected.”

Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, didn’t immediately respond to telephone and e-mail requests for additional comment. Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.28 trillion of assets as of March 31.

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