Pimco chief Mohamed El-Erian on Thursday put low odds on a third round of U.S. monetary stimulus unless there is a major further deterioration in the U.S. economic outlook.
We would assign a low probability (at) this stage to QE3 given the general recognition that the forward-looking cost-benefit analysis has shifted away from the potential benefits and toward greater costs and risk, El-Erian, co-chief investment officer of Pimco, said in a live blogging question and answer session on Reuters.com.
Therefore, it would take a major further deterioration in the economic outlook, combined with a willingness by the Fed to take greater reputational and political risks, he said.
Pimco, which manages $1.2 trillion in assets, is home to the world's largest bond fund.
El-Erian's outlook follows the June 22 forecast of fellow Pimco Co-Chief Investment Officer Bill Gross that the Federal Reserve would hint at a third round of bond purchases, or QE3, at the Jackson Hole meeting in August.
Also on June 22, the U.S. Federal Reserve cut its forecast range for U.S. economic growth to 2.7-2.9 percent from 3.1-3.3 percent. It offered no hint it would offer further monetary support via quantitative easing.
At the end of June its quantitative easing program, which consisted of purchasing $600 billion worth of U.S. debt, also known as QE2, expired.
The row in Washington over the United States' debt ceiling and a potential downgrade to its AAA credit rating has drawn global attention to the health of the economy and whether it needs more government help.
The three major credit rating agencies have all put the U.S. government on warning that it faces a downgrade if debt payments are missed come August 2, when the U.S. Treasury says it will have exhausted its financial resources.
The U.S. Congress has the authority to raise the country's borrowing limit.
El-Erian said a cut to the U.S. credit rating would be disruptive to a global economy that is constructed with the U.S. at its core. Or to be even more blunt, the U.S. is the core of the core.
If the rating were cut, global financial markets would become more volatile with the risk of major re-allocations of capital both within and across borders, El-Erian said.
And it would severely weaken the standing of the global public goods provided by the U.S., encouraging greater economic and financial fragmentation, El-Erian wrote.
However, if a QE3 program were to materialize, El-Erian predicted it would take the form of renewed asset purchases combined, possibly, with various forms of partial interest rate ceilings.
In the event no agreement is reached between the White House and the Republican-controlled Congress, El-Erian pointed to the safety of gold.
The likely consequences for markets would include a simultaneous sell off in equities, bonds and the currency. Gold would most likely benefit from the flight to quality, he wrote.
He added that central banks have in recent months increased their purchases of gold as a way of incrementally diversifying their reserves away from the U.S. dollar on fears it will weaken further.
Spot gold prices are up 24 percent in the year since Fed Chairman Ben Bernanke floated the idea of launching QE2 at the Kansas City Fed's annual economic symposium in Jackson Hole, Wyoming in 2010.
Gold is off its all-time high of $1,575 per ounce hit in May, but currently trading around $1,528.
For a link to the live Q&A postings on Reuters.com, click on http://reut.rs/mUDcFg
(Reporting by Daniel Bases and Jennifer Ablan; Editing by Kenneth Barry and Andrew Hay)