Pimco warns 'material risk globally' of monetary policy exhaustion

NEW YORK (Reuters) - U.S. asset manager Pacific Investment Management Co on Wednesday warned of a risk that zero interest rates and other unconventional monetary policies in place will be insufficient to maintain global growth, close output gaps and raise inflation to target.

The offices of Pacific Investment Management Co (PIMCO) (L) are shown in Newport Beach, California August 4, 2015. REUTERS/Mike Blake

In its annual Secular Forum report, Pimco said that with growth slow and debt levels higher than during the pre-crisis experience, “there are no obvious ‘spare tires’ available globally if and when monetary policy exhaustion threatens global stability.”

Put another way, Pimco, which had assets under management of $1.5 trillion as of March 31, said “the global economy finds itself today in a state of disequilibrium that has remained stable thus far only via three policy props: zero or near-zero interest rate policy, QE (Quantitative Easing), and levering up in China, some other emerging market economies and the European periphery.

“We concluded there are diminishing returns to all three of these policy props, while at the same time we believe the costs of unconventional policy are rising and the ability to maintain growth with ever-higher leverage in some countries is limited,” wrote authors Andrew Balls, Richard Clarida and Dan Ivascyn.

Against this backdrop, Pimco sees its baseline view for the U.S. GDP growth at or slightly above an expected 1.5 percent to 2 percent annually over the next three to five years.

Pimco also estimates inflation at around 2 percent, the Federal Reserve’a target rate, gradually lifting the federal funds rate to a “new neutral” range of 2 percent to 3 percent.

“There is the distinct possibility that the left tail has gotten fatter, and that monetary policy exhaustion and an overhang of debt in some major economies pose material threats to the sustainability of the global recovery and financial stability,” the author said.

Pimco, based in Newport Beach, Calif, is a unit of Allianz SE, a German financial services provider.

To investors, Pimco said “stay on dry land and preserve capital.” Last week, Ivascy, group chief investment officer at Pimco, told Reuters that Pimco has been reducing its energy-related exposure as well as corporate credits, given the run-up in prices in recent months.

“At these valuations, corporate credit looks a little less interesting here,” Ivascyn said. Ivascyn also said he sees a better than 50/50 chance of a Federal Reserve rate increase later this month.

Reporting By Jennifer Ablan; Editing by Chizu Nomiyama and Steve Orlofsky