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Gross Says Markets Misinterpreting Bernanke on Inflation

June 19 (Bloomberg) -- Bill Gross, manager of the world's biggest mutual fund at Pacific Investment Management Co., talks about bond market reaction to Federal Reserve Chairman Ben S. Bernanke's remarks that the central bank may begin reducing bond purchases later this year and end them in the middle of 2014 if the U.S. economy continues to improve. Gross, speaking with Trish Regan, Adam Johnson and Michael McKee on Bloomberg Television's "Street Smart,' also discusses the outlook for Fed policy and the economy. (Source: Bloomberg)

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest mutual fund, said investors who are selling Treasuries on expectations that the Federal Reserve will scale back its accommodative policy are missing the influence of inflation on the Fed’s decision.

“The market basically has misinterpreted the growth and unemployment targets while leaving out the inflation targets going forward,” Gross said in an interview today on Bloomberg Television’s “Street Smart” with Trish Regan and Adam Johnson. “This is a combined growth, unemployment and inflation type of combination that has to be delicately managed.”

Fed Chairman Ben S. Bernanke said the central bank could start reducing bond purchases later this year and end them in the middle of 2014 if the economy continues to improve as the central bank forecasts. The U.S. unemployment rate will fall to 6.5 percent to 6.8 percent by the end of 2014, Fed officials predicted, possibly reaching the central bank’s stated threshold to raise the benchmark lending rate.

Ten-year Treasury yields jumped 13 basis points, or 0.13 percentage point, to 2.32 percent, the highest level since March 21, 2012, at 3:24 p.m. in New York, according to Bloomberg Bond Trader prices. The Standard & Poor’s 500 Index (SPX) lost 1.4 percent to close at 1,628.93.

Photographer: Andrew Harrer/Bloomberg

Bill Gross, co-chief investment officer of Pacific Investment Management Co. (PIMCO). Close

Bill Gross, co-chief investment officer of Pacific Investment Management Co. (PIMCO).

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Photographer: Andrew Harrer/Bloomberg

Bill Gross, co-chief investment officer of Pacific Investment Management Co. (PIMCO).

The Federal Open Market Committee said in its statement that policy makers expect inflation over the medium term to be at or below its 2 percent objective. U.S. central bankers in December linked changes in the benchmark borrowing cost to the outlook for employment and prices. The FOMC said the rate will remain in a range of zero to 0.25 percent so long as unemployment stays above 6.5 percent and the outlook for inflation is no higher than 2.5 percent.

Jobless Rate

The nation’s jobless rate in May was 7.6 percent. A gauge of consumer prices excluding food and energy that is watched by the Fed rose 1.1 percent in the year through April, matching the smallest gain since records started in 1960.

Investors who are selling Treasuries in anticipation the Fed will ease out of the market because of reduced unemployment will be disappointed because inflation isn’t near the 2 percent target, Gross said today.

“We think the chairman and the Fed is taking very much of a cyclical type of view,” Gross said. “The Fed itself may be driving in a fog to think that it’s a cyclical as opposed to a structural problem in terms of our economy.”

To contact the reporter on this story: Alexis Leondis in New York at aleondis@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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