Bill Gross said the Federal Reserve needs to raise interest rates as soon as possible, trading some near-term market losses for longer-term stability and a healthier financial system.
If zero interest rates become the long-term norm, economic participants will soon run on empty because their investments aren't producing the gains or cash flow needed to finance past promises in an aging society, he wrote in an investment outlook on Wednesday for Denver-based Janus Capital Group Inc. That's already beginning to happen as Detroit, Puerto Rico, and, he predicts, soon Chicago, struggle to meet their liabilities.
“My advice to them is this: Get off zero and get off quick,” Mr. Gross urged the central bankers. He said it's time for a “new thesis” that allows people in developed economies to save, enabling liability-based business models to survive and spurring more private investment, “which is the essence of a healthy economy. Near term pain? Yes. Long term gain? Almost certainly. Get off zero now!”
The Fed last week decided to keep its benchmark rate near zero, showing reluctance to end an era of record monetary stimulus in a time of market turmoil, rising international risks and slow inflation at home. Futures traders are betting the Fed is unlikely to act in October, as they put 43% odds on an increase by December and 51% by January, according to data compiled by Bloomberg.
Last week, Mr. Gross said the Fed was right to keep interest rates near zero at the September meeting, and that it may take years for the economy and rates to return to more normal levels. Monetary policy has exhausted its effectiveness, with asset prices distorted by years of near-zero rates, and fiscal policy will be needed to get the economy back on stronger footing, Mr. Gross said in a Sept. 18 interview with Tom Keene and Michael McKee on Bloomberg Radio.
“They did the right thing,” he said in that interview, citing current financial conditions. “When they did the wrong thing, and this is way back in terms of past history, they went below 2% in terms of the short-term rate. They didn't have to do that, they didn't have to go to zero. So now getting back up there will wreak havoc on asset markets.”
Mr. Gross, 71, joined Janus about a year ago after leaving Pacific Investment Management Co., where he once ran the world's biggest mutual fund. He now oversees the $1.4 billion Janus Global Unconstrained Bond Fund. The fund lost 1.7% this year, putting it behind 76% of similar funds, according to data compiled by Bloomberg.
Mr. Gross underscored that it's not just insurance companies and giant pension funds that are suffering from low interest rates. Investors aren't getting the 8% to 10% returns they counted on to pay for education, health care, retirement or vacation.
“Mainstream America with their 401(k)s are in a similar pickle,” he wrote. “They are not so much in a pickle barrel as they are on a revolving spit, being slowly cooked alive while central bankers focus on their Taylor models and fight non-existent inflation,” Mr. Gross said, referring to a rule named for Stanford University economist John Taylor.
Fellow famed bond manager Jeffrey Gundlach, co-founder of $80 billion DoubleLine Capital, sees a fifty-fifty chance the Fed will raise interest rates in December. Mr. Gundlach forecast “choppiness” in fixed-income markets, though he said yields won't actually change much. Los Angeles-based Mr. Gundlach has been saying for months that the Fed may not be able to raise rates this year for reasons including a strong dollar.