Gross: US economy must grow at least 3% to end QE

PIMCO’s Bill Gross said the US economy needs to grow by 3% and upwards for several quarters in order to avoid another round of QE.

Gross (pictured), manager of the world’s biggest bond fund. said although Ben Bernanke’s monetary policy speech, due to take place at Jackson Hole later today, could be “snoozy” he still believes more QE will be announced “relatively soon”.

In an interview with Bloomberg television, he said the Federal Reserve chief knows each round of QE has been less effective than the last, but this will not stop Bernanke from deciding on more easing.

“It is a conundrum so to speak, it could be a relatively snoozy speech. We might just get a history of what he has done as opposed to hints of what he will do.

“I suspect he will substantiate what we read in the Fed minutes from their August meeting which may be hints of quantitative easing should there be a lack of sustainable economic growth. He did not define that but I would suspect that unless the economy is growing at 3% plus for several quarters then we are going to see QE relatively soon.

“I think it is obvious that with each step, with QE1, with QE2 and with Operation Twist that the effects have been more and more limited. I think Bernanke knows that aside from some extreme kind of measure that the economic effects and the effects on equity markets and bond markets are going to be limited.”

Gross also said the Fed is still willing to ease, despite some signs of improvement in the economy, because they have a dual mandate.

“One of the mandates is inflation, which is actually below their 2% target. The other is economic growth which is still connected to unemployment.

“Unemployment is still above 8% and it is obvious the Fed is not comfortable, nor is the economy and the nation comfortable with 8% unemployment going forward.  Until that number is in the low sevens and inflation is above 2%, the Fed will do what they have done in the last two to three years and that is to ease quantitatively,” said Gross.

“I think from this point forward even Ben Bernanke would agree that the next quantitative ease would produce limited results,” he added.

 

This article was first published on Investment Week

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