Tags: Pimco | Stocks | fed | Rates

Pimco’s Kashkari: Stick With Stocks While Rates Stay Low

Friday, 13 Apr 2012 07:47 AM

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Investors should expect solid corporate earnings to continue and attractive plays in the stock market to follow so long as the Federal Reserve sticks with its plans to keep interest rates near zero percent, says Neel Kashkari, head of global equities at bond fund Pimco.

The Federal Reserve has said economic conditions warranting exceptionally low interest rates will likely stick around through 2014, while on the fiscal side, corporate taxes aren't likely to rise.

"We think the Fed is going to keep the cost of capital low for corporations. And, I think if you look at Washington, the momentum, if anything, is to keep corporate taxes low," Kashkari tells CNBC.

Editor's Note: Did Bernanke Rig Your Retirement? Shocking Video . . .

Not only has the Federal Reserve cut rates, it has also injected trillions of dollars into the economy via asset purchases from banks in two rounds, a policy known as quantitative easing, dubbed QE1 and QE2 by the markets.

Markets have grown dependent on such liquidity and reversing such policy either by forgoing fresh injections in the future, which would be known as QE3, or mopping up what's already in circulation will spark outcry from markets.

Fears of such outcry will likely prompt Fed officials to stay the current policy course until the economy really gains steam.

"It’s like a morphine drip; it makes the patient feel better, but it doesn’t cure underlying disease. The moment you try to take the morphine away, the patient wakes up in a lot of pain," Kashkari says.

"Markets are getting addicted to this easy money policy, and I think as the Fed tries to back away, risk markets are going to respond and that's going to put more pressure on the Fed to act ... so our central forecast is the Fed will stay easy, with maybe even QE3 through the end of 2014."

Federal Reserve Vice Chair Janet Yellen, an influential policymaker, says the U.S. central bank will keep an eye out for signs of deteriorating economic conditions and consider QE3 or a similar policy if needed.

"I consider a highly accommodative policy stance to be appropriate in present circumstances. But considerable uncertainty surrounds the outlook, and I remain prepared to adjust my policy views in response to incoming information," Yellen said in prepared remarks.

"In particular, further easing actions could be warranted if the recovery proceeds at a slower-than-expected pace, while a significant acceleration in the pace of recovery could call for an earlier beginning to the process of policy firming than the FOMC currently anticipates," referring to the Federal Open Market Committee (FOMC), the body that votes on monetary policy.

Editor's Note: Did Bernanke Rig Your Retirement? Shocking Video . . .

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