[NEW YORK] 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 in the developed world, where 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," Gross urged the central bankers. It's time for a "new thesis" that allows people in developed economies to save, enabling liability-based businesses 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 41 per cent odds on an increase in December and 48 per cent in January, according to data compiled by Bloomberg.
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 US$1.4 billion Janus Global Unconstrained Bond Fund. The fund lost 1.7 per cent this year, putting it behind 76 per cent 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 per cent to 10 per cent 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.