Bill Gross says Fed to tighten even with job growth slowing

[NEW YORK] Bill Gross says the Federal Reserve will raise borrowing costs in August or September, even with employment growth slowing, because officials want to normalize policy after keeping interest rates around zero since 2008.

"They want to get off the dime," Mr Gross said in a Bloomberg Television interview. "They want to get off zero, if only to prove that they don't have to stay at zero for a long, long time."

The Fed will raise rates 50 basis points per year, bringing its overnight benchmark rate to 2 per cent by 2018, according to Gross, who runs the US$1.5 billion Janus Global Unconstrained Bond Fund. That would still be significantly below the central bank's own forecast of 3.75 per cent.

The Labour Department said on Friday that the economy added 126,000 jobs in March, compared with a median forecast of 245,000 in a Bloomberg News survey. The gains were the smallest since December 2013 and weaker than the most pessimistic forecast in the Bloomberg survey, undermining what had been the only segment of the economy showing consistent growth. Inflation has remained below the Fed's target for almost three years and retail sales have declined for three consecutive months.

The rate at which unemployment becomes neutral in terms of its impact on pushing inflation higher or lower may be as little as 4.5 per cent, given that the underemployment rate is at 10.9 per cent, according to Mr Gross. A more typical difference between that and the jobless rate, currently 5.5 per cent, is about three percentage points, he said.

"Obviously, the economy's cooling," Mr Gross said. "It's a weaker economy at the moment." Janus under Mr Gross has bought shorter-term Treasuries with an average maturity of about four years while selling short German sovereign debt, which has traded at record low yields, with five-year securities yielding as little as 0.12 per cent below zero and 10-year debt at 0.17 per cent.

Mr Gross, 70, had been the chief investment officer at Pacific Investment Management Co until his abrupt departure in September. He earned his reputation by building Pimco into a US$2 trillion money manager at its peak, with some of the industry's highest returns. His Pimco Total Return Bond Fund, which he managed until he left, ballooned to US$293 billion in April 2013, before performance faltered and clients started to pull money amid concern that interest rates would rise.

The odds of a June liftoff implied by fed funds futures fell to 14 per cent after the report from 18 per cent Thursday. The implied probability of a September rate rise also slumped after the release, dropping to 35 per cent from 39 per cent.

Options on Eurodollar futures imply traders see only a 47 per cent chance the Fed will raise rates this year, and just a 55 per cent chance it climbs from near zero by March 2016.

BLOOMBERG