Federal Reserve Chairman Ben Bernanke will likely announce plans to stimulate the economy via a third round of asset purchases from banks in the near future, as it’s just a question of when and not if, said Pimco Managing Director Neel Kashkari.
Under quantitative easing (QE), the Fed buys assets like Treasury holdings or mortgage-backed securities from banks, pumping the economy full of liquidity to push down borrowing costs and encourage investing and hiring, sending stock prices rising in the process.
The Fed has rolled out two such rounds since the downturn, injecting $1.7 trillion into the economy in a first round and then $600 billion in a second round with freshly printed money.
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A third round could come on an open-ended basis, meaning the Fed would buy assets for as long as it takes, he noted.
“If the Fed were to come out with an open-ended commitment, saying, ‘We will continue to ease monetary policy, continue to expand our balance sheet until we achieve some economic outcome — meaning nominal [gross domestic product] growing, unemployment coming down — that would be very, very powerful,” Kashkari told CNBC.
“At most, I would expect him to give more details on what such a program could look like. I doubt he’ll actually come out with the actual specifics this Friday.”
On Friday, the Fed will open its annual symposium at Jackson Hole, Wyo., where in the past, Bernanke has announced stimulus measure.
Markets have assumed some sort of announcement, if not at Jackson Hole then sometime shortly afterwards.
“I think that the equity markets have priced in assuming there will be some form of QE3, if he comes back and walks back away from that, I think you’re going to see risk markets react,” Kashkari said.
Some Fed officials say they remain poised to intervene, though they recognize that monetary stimulus measures carry diminishing returns.
“I am supportive of actions that provide economic benefits with manageable risks,” Cleveland Fed President Sandra Pianalto told a business audience in Newark, Ohio, according to Reuters.
“Monetary policy should do what it can to support the recovery, but there are limits to what monetary policy can accomplish,” she added.
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