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Fed needs to double balance sheet: PIMCO

Posted by smeddum on March 27, 2009

By Faith Hung
Thu Mar 26,
TAIPEI (Reuters) – Bond giant Pacific Investment Management Co said the Federal Reserve needs to double its balance sheet up to $6 trillion to replace the amount of wealth destroyed in the United States, an executive said on Thursday.

Liabilities on the Fed’s balance sheet should rise to between $5 trillion and $6 trillion later this year amid the financial crisis that roiled global markets, said Brian Baker, chief executive Pimco Asia Ltd.

“Right now, the Fed has spent about $3 trillion. We believe there has to be further stimulus policies put in place,” Baker told Reuters.

The central bank’s aggressive unconventional policy measures to revive dormant credit markets have pushed its balance sheet above $2 trillion in mid-March, according to data released by the Federal Reserve.

Central banks across the United States, Asia and Europe have lowered their interest rates aggressively since late 2008 as part of broader efforts to bolster the global economy, fanning hopes rates will continue to stay low for years.

“In developed markets, interest rate policy is pretty much as low as it can go,” he said. “We believe short-term rates in developed markets are going to be near zero for several years.”

Pimco is a unit of Allianz Global Investors, which managed about $970 billion in client assets at the end of 2008 and says it is the world’s biggest fund house.

Pimco’s chief investment officer Bill Gross is one of the industry’s most widely watched figures.

Pimco is buying high-yield bonds in some U.S. banks that have received government support.

“We are investing in Citibank. We are investing in Bank of America. Those are, we believe, national champion banks or financial institutions that will survive,” he said.

The asset manager is also buying corporate and government bonds of South Korea, Indonesia and the Philippines.

Pimco is underweight emerging markets after cutting its exposure recently, Baker said.

(Additional reporting by Yvette Chen, Editing by Jacqueline Wong)

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