Tags: Gross | Fed | taper | QE

Pimco's Gross: Fed Will Taper Its QE Later This Year

Monday, 10 Jun 2013 01:13 PM

By Dan Weil

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The Federal Reserve will begin pulling back on its quantitative easing (QE) before year-end, predicts Bill Gross, co-chief investment officer of fund giant Pimco.

The Fed is currently buying $85 billion of Treasurys and mortgage-backed securities a month.

"I have a sense that at some point later in the year they will have to taper, if only because the budget deficit isn't what it was," Gross tells Yahoo.

Editor's Note:
Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

"Depending on the number, a $600 billion deficit does not allow for $85 billion a month in check writing." In other words, there won't be enough Treasury supply going around to enable the Fed to keep buying at its present pace, Gross explains.

The Congressional Budget Office estimates the deficit will total $642 billion in fiscal 2013, which ends Sept. 30.

"If the Fed owns all of the Treasurys, then there is no market. At some point they taper if only to permit the rest of us to have a few."

But Gross believes the economy's sluggishness will keep the Fed from curbing QE much.

"I simply don't think economic conditions, whether it be this trek toward unemployment at 6.5 percent or almost desperately low inflation close to 1 percent, would justify significant tapering," he notes.

Excessive tapering could cause problems abroad too, economists say.

"The implications for China may potentially give cause for concern," Wei Yao, China economist at Societe Generale, writes in a commentary obtained by CNBC.

Already "we see a good chance of capital outflows and yuan depreciation in the second half," she predicts. Fed tapering could spark another large-scale capital outflow, "which could materially squeeze onshore liquidity conditions," Wei states.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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