As we approach a rate hike from the Federal Reserve, billionaire investor Bill Gross is arguing the central bank has already missed its opportunity. The “Bond King,” as he’s known on Wall Street, thinks the failure of monetary stimulus will bring about a colossal economic collapse.
Gross used to run Pacific Investment Management Company, or PIMCO, the largest bond fund in the world. He amassed a vast fortune handling money for institutional investors, making him a sought-after guest for financial talk shows. His fame and investing success fed into each other until he became one of the most famous investors alive.
And right now, he thinks the global economy is in dire straits. From his new perch at Janus Capital, Gross will occasionally release a short piece of market commentary. In a post from Wednesday September 2nd, Gross took a swipe at the Federal Reserve for completely bungling the economic recovery.
“The Fed is beginning to recognize that 6 years of zero bound interest rates have negative influences on the real economy,” he said. “Finance-based capitalism with its zero bound interest rates has now produced global imbalances that impair productive growth and with it the chances for ‘old normal’ prosperity.” (Source: Janus Capital Blog, September 2, 2015.)
Bill Gross Thinks the Fed Reacted Too Slowly
More specifically, Gross takes issue with how the central bank is tightening monetary policy. The Federal Reserve’s balance sheet quadrupled between 2007 and 2015 as the bank was buying bonds from distressed banks. Its liabilities are now above $4.0 trillion.
At the same time, interest rates were driven to historic lows. Even as asset purchases were scaled back, the federal funds rate hovered barely a scratch above zero. The Fed has continuously hinted at raising rates before 2016, with the first one supposedly due after the Federal Reserve Open Markets Committee, or FOMC, meets on September 16th.
Of course, the rate hike is dependent on a number of factors. Fed policymakers will keep an eye on domestic indicators, China’s stock market, and the vulnerability of emerging markets. If they decide the headwinds are too significant, expect some kicking of the can.
But even if the Fed begins its tightening process, the Bond King thinks it will be “too little, too late.” Writing on the company blog, Gross argued “a new neutral policy rate should be closer to 2% nominal, but now cannot be approached without spooking markets further and creating self-inflicted ‘financial instability.’”
In the long run, says Gross, there are six years of unrestrained stimulus to make up for, and the time for bold action has already sailed by.