Pacific Investment Management Co. and BlackRock Inc., which together oversee almost $5 trillion, say the U.S. economy is stalling.
Bill Gross, who runs the world’s biggest bond fund at Pimco, and Peter Fisher, head of fixed income at BlackRock, say the Federal Reserve is preparing measures to counter the slowdown.
“We’re not looking at a recession yet, but we’re at a tipping point,” Gross said in an interview on Bloomberg Television's "Street Smart with Carol Massar and Matt Miller" yesterday. “We’re at what we call a stall speed in which corporate profits don’t grow, jobs aren’t created,” said Gross, who is based in Newport Beach, California.
The U.S. recovery that began two years ago has been losing momentum and there are even odds the nation will slip into a recession, according to Harvard University economics professor Martin Feldstein. Investors who are seeking safety from a slowing economy and betting the central bank will keep interest rates on hold are snapping up Treasuries, sending two-year yields to a record low 0.3081 percent today.
The Fed may arrange a third round of quantitative easing, known as QE3, Gross said. The central bank purchased bonds to cap borrowing costs in the first two easing efforts. The Fed has also promised to keep the target for overnight bank lending low for an “extended period.” Policy makers cut the target rate to a range of zero to 0.25 percent in 2008 to support the economy.
“There’s a potential for a QE3,” said Gross, who oversees $1.28 trillion as Pimco’s co-chief investment officer. “I suggest, however, that that takes the form really of language, of extended period language, and maybe some type of cap on five-or even 10-year Treasury securities.”
Two-year notes yield seven basis points more than the upper end of the Fed’s target range, the least since Dec. 15, 2008. Policy makers cut the benchmark to the record-low current range the following day.
The U.S. economy is “very close to stall speed” and the Fed may need to consider signaling a longer commitment to low interest rates, according to BlackRock’s Fisher, who is based in New York.
“I believe the Fed is dusting off contingency plans if the economy does not improve,” he said in a report that BlackRock distributed by e-mail today. Fisher worked for 15 years at the Fed Bank of New York, according to BlackRock, which has $3.66 trillion in assets.
U.S. gross domestic product expanded at a 1.3 percent annual rate in the second quarter, after a 0.4 percent pace in the prior period, the worst six months since the recovery began in June 2009, according to the Commerce Department.
“This economy is really balanced on the edge,” Feldstein said yesterday in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “There’s now a 50 percent chance that we could slide into a new recession,” he said.