(January 9, 2013) — Federal Reserve Chairman Ben Bernanke must muster every means he can to help the United States and the world emerge from a gloomy time, a paper by Pacific Investment Management Company (PIMCO) says.
A whitepaper by Tony Crescenzi, PIMCO’s executive vice president, market strategist and portfolio manager, outlines an array of suggestions for the nation’s top central banker.
A major point on the list: Keep volatility low. Since uncertainty tends to breed market volatility, the more predictable, transparent, credible and understandable the Fed’s actions are, the less volatile markets are likely to be. “To the extent that the Fed reduces uncertainty in the bond market, it may reduce the ‘term premium’ in bonds – the extra yield that investors demand to compensate for uncertainty, particularly for the uncertainty that tends to surround potential changes to the federal funds rate, the benchmark rate that the Fed aims to control.” According to PIMCO, the Fed has so far been very successful in achieving a lowered bond premium. Going forward, “the Fed must ensure that its latest experimentation with communications and buying bonds also aims to keep volatility low. It’s not clear that it will.”
Another item on the list: Play offense. In other words, according to PIMCO, the Fed’s monetary policy should aim to promote faster economic growth. “The Fed’s mantra in 2013 therefore must be to print, print, print, thereby using coinage to nudge annual growth in nominal gross domestic product (GDP) toward 5% instead of the recent slow pace of about 4%,” the bond manager notes.
Housing is another big issue in PIMCO’s eyes. For the first time in seven years, PIMCO is expecting the US housing sector to strengthen and contribute to economic growth. “Although we believe the recovery is rooted in the reduction of excess supply resulting from a severe underbuilding of homes relative to population growth and demographic trends, the Federal Reserve’s interest rate policies deserve some credit,” the paper says. While the Fed’s purchase of about $1.5 trillion (and rising) of mortgage-backed securities has helped, there’s more the Fed can do, says Crescenzi. For example, on the regulatory front, the Fed can consider current housing conditions when it crafts rules for implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act.