Pimco Chief: Fed Will Buy More Treasuries and Toxic Mortgage Backed Securities
June 14th, 2009Via: Reuters:
The rapid rise in bond yields will force the Federal Reserve to “engage again” in the purchases of U.S. Treasuries and mortgage-backed securities, Mohamed El-Erian, the chief executive of bond giant Pacific Investment Management Co., said Friday.
The surge in Treasury yields is lifting mortgage rates, threatening to dampen home demand and kill off the refinancing boom that is bolstering the health of some households.
“What mistake can the U.S. economy afford to make? If you look at it that way, I suspect that we will see the Fed engage again in these markets,” El-Erian, who oversees $756 billion at PIMCO, told Reuters Financial Television.
Debate is brewing within the Federal Reserve over whether it should ramp up its purchases of Treasuries and mortgage-backed securities to keep a lid on interest rates, or scale them back to avoid an outbreak of inflation.
Massive buying of securities by the U.S. central bank has doubled the size of its balance sheet to around $2 trillion as it flooded the economy with money to prevent a severe recession getting worse.
The Fed’s Open Market Committee voted unanimously in April to keep unchanged its targets for purchases of MBS and long-term Treasuries. But the panel left the door open to increasing purchases at future meetings if needed to secure a stronger recovery, according to minutes of the meeting. The FOMC next meets on June 23-24 in Washington.
DOLLAR, JUNK BONDS VULNERABLE
Investors’ fears in the United States and abroad are rising about the health of America’s economy, owing to its need to borrow for stimulus programs. That will keep the U.S. dollar under pressure, El-Erian said. “We could be embarking on a multiyear process of erosion, at the margin, of the global standing of the U.S.”
