Oct. 24 (Bloomberg) -- The Federal Reserve is likely to increase monetary stimulus, including an expansion of its balance sheet, according to Pacific Investment Management Co., which oversees the world’s largest bond fund.
Growth in the U.S. will be constrained next year amid an “unprecedented amount” of fiscal contraction, Scott Mather, Pimco’s head of global portfolio management, said at a briefing today in Sydney. The Fed will start by changing its language before taking steps to bolster the economy including efforts to stabilize the housing market, he said.
“You’ll see the language change first and then probably some of these other things,” Mather said. “They’re not done. They’ve told us that there’s more that they’re thinking about, that they can and will do.”
Fed Vice Chairman Janet Yellen said Oct. 21 that a third round of large-scale securities purchases might become warranted to boost an economy challenged by an unemployment rate of 9.1 percent and financial turmoil.
Policy makers are struggling over how to improve public understanding of their actions, Philadelphia Fed President Charles Plosser told reporters on Oct. 12. The Fed could make it clearer how its policies hinge on inflation, inflation expectations and resource utilization, he said after a speech in Philadelphia.
As the U.S. economic outlook worsens, the Fed will probably expand its balance sheet by undertaking some of the steps it has hinted at previously, said Mather.
These may include “buying mortgages, trying to work with the fiscal authority and regulators to get mortgage finance costs down in the U.S. because they realize that would be very powerful in supporting the economy,” he said. “That’s where we sense there’s a higher degree of coordination now with the fiscal authorities, with the regulators.”
Pimco founder Bill Gross boosted holdings of mortgage bonds to 38 percent of assets in his $242 billion Total Return Fund in September, from 32 percent the prior month, according to data on the Newport Beach, California-based company’s website.
Sales of existing homes dropped 3 percent in September to a 4.91 million annual rate, figures from the National Association of Realtors showed Oct. 20. The median price dropped 3.5 percent from a year ago and about one in five real-estate agents polled said contracts had been canceled, the group said.
Fed Governor Daniel Tarullo said Oct. 20 that the central bank should consider resuming large-scale purchases of mortgage bonds to boost growth.
The economy probably grew in the third quarter at the fastest pace this year, economists said before a report Oct. 27.
Gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual rate after advancing 1.3 percent in the previous three months, according to the median forecast of economists surveyed by Bloomberg News before the Commerce Department’s report.
Fiscal retrenchment could subtract 1.5 percentage points to 2 percentage points from growth in 2012, a drag that will make it difficult to reduce unemployment, economists at Bank of America Merrill Lynch, JPMorgan Chase & Co. and Deutsche Bank AG said earlier this year.
“What makes us most concerned about going into next year is that we have an unprecedented amount of fiscal contraction baked into the cake,” said Mather.
The low growth and low inflation environment will benefit U.S. Treasuries, he said.