The Federal Reserve will probably increase Treasury purchases to revive a U.S. economy that is almost stalled, Paul McCulley, a portfolio investor at Pacific Investment Management Co., wrote on the company’s website.
Pimco, which runs the world’s biggest mutual fund, estimates U.S. gross domestic product growth will be in a range of 1.5 percent to 2 percent for the next year, versus 1.7 percent that the Commerce Department reported for the second quarter. Inflation will slow to a band of 0.75 percent to 1.25 percent, McCulley said in his report. The figure was 1.4 percent in August from the year before, Commerce Department figures show.
Fed Chairman Ben S. Bernanke said yesterday that the central bank’s first round of large-scale asset purchases improved the economy and that further buying will probably help more. Policy makers are debating whether to increase the amount they buy, a strategy known as quantitative easing, as soon as their next meeting on Nov. 3.
“A new round of quantitative easing is likely,” McCulley, who is based in Newport Beach, California, said in his report. “The bottom line for the U.S. is a growth trajectory so slow you’d nearly call it stalled.”
The economies of Europe, Japan, the U.S. and the U.K. will have trouble picking up, according to Pimco’s report.
Bill Gross and Mohamed A. El-Erian, Pimco’s co-chief investment officers, coined the phrase “new normal” in 2009 to describe the decreasing role of the U.S. in the global economy. They forecast developed-market growth that is below historical averages in the next three to five years as economies struggle with mounting budget deficits and increased regulation after the 2008 collapse of credit markets.
The slumping U.S. housing market is dragging down prospects for growth in the world’s largest economy, according to Pimco.
“If we do not have the housing market functioning again, the consumer will continue to be under this gravitational force of the debt overhang,” El-Erian said in an interview yesterday on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “And it’s going to be very difficult to get high growth generated.”
Bernanke said the first wave of asset buying that ended in March was effective in spurring the economy. The central bank said in August it would use principal payments from its holdings of agency mortgage-backed securities and agency debt to buy Treasuries. It announced on Sept. 21 it is prepared to do more to help the economy and to keep costs from falling.
“The additional purchases — although we don’t have precise numbers for how big the effects are — I do think they have the ability to ease financial conditions,” Bernanke said yesterday in response to questions in Providence, Rhode Island, at a forum with college students.
The Bank of Japan is also increasing asset purchases to spur its economy, creating a 5 trillion yen ($60 billion) fund to buy government bonds and other assets, it announced after its two-day policy meeting today. It also lowered its benchmark interest rate to a range of zero percent to 0.1 percent, from the previous 0.1 percent.
“It is difficult to generate growth given Japan’s deflationary and demographic realities,” McCulley wrote. “Japan has limited political willingness to boldly pursue reflationary policies, and they have major doubts as to the effectiveness of such measures, even if tried.”
The record $252 billion Pimco Total Return Fund managed by Bill Gross returned about 10 percent this year, beating 80 percent of its peers, according to data compiled by Bloomberg.
Gross said developing markets such as Brazil and South Korea offer attractive investment opportunities amid the slowdown in advanced economies.
“Brazil offers, yes perhaps, an over-appreciated currency, but also a real rate of interest of 8 percent to 9 percent,” Gross, 66, said. “And that’s quite attractive.”
Pimco, which managed more than $1.1 trillion of assets as of June 30 according to its website, is a unit of Munich-based insurer Allianz SE.
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