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Gross Says Fed on Course to End QE Even With Slowing Job Growth

Photographer: Andrew Harrer/Bloomberg

Pacific Investment Management Co. co-Chief Investment Officer Bill Gross. Close

Pacific Investment Management Co. co-Chief Investment Officer Bill Gross.

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Photographer: Andrew Harrer/Bloomberg

Pacific Investment Management Co. co-Chief Investment Officer Bill Gross.

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said the Federal Reserve is on course to end its bond buying this year even with job growth at the slowest pace since January 2011.

“I do believe that by the end of 2014, the Fed wants to be out,” Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene, referring to the central bank’s purchases in its quantitative easing program. Yet “by the end of 2015, they will not have raised interest rates.”

Payrolls in December increased at the slowest pace since January 2011, indicating a pause in the recent strength of the U.S. labor market that may partly reflect the effects of bad weather. The 74,000 gain in payrolls, less than the most pessimistic projection in a Bloomberg survey, followed a revised 241,000 advance the prior month, Labor Department figures show.

The benchmark 10-year note yield decreased six basis points or 0.06 percentage point, to 2.90 percent at 8:52 in New York, Bloomberg Bond Trader data showed. The 2.75 percent note due in November 2023 added 17/32, or $5.31 per $1,000 face amount, to 98 22/32. The yield climbed to 3.05 percent on Jan. 2, the highest since July 2011.

The Fed cut monthly purchases to $75 billion starting in January, from $85 billion, citing improvement in the labor market. Fed officials will gather Jan. 28-29 for the next policy meeting.

Forward Guidance

“The most certainty in terms of current prices and future policy lies in the Fed and its forward guidance that we’ve received -- that they will not change the fed fund rate until after the taper is over,” said Gross in the interview. “After that time point, there will be a considerable period of time in which they will then decide whether or not they will begin to move upward. In 2016 we still see a Fed funds rate at close to 25 basis points.”

The Federal Open Market Committee said last month it will keep the benchmark federal funds rate near zero “well past the time” unemployment falls below 6.5 percent, especially if projected inflation continues to run below their 2 percent target. The bond tapering combined with forward guidance support were “intended to keep the level of accommodation the same overall and to push the economy forward,” Fed Chairman Ben S. Bernanke told reporters on Dec. 18.

Fed Distortion

Since lowering the benchmark interest rate to near zero in December 2008, Fed officials have relied on bond buying and forward guidance about their plans to try to spur growth.

The Fed’s bond buying, which began in 2008, has distorted bond yields, pushing them to levels that are below where economic conditions would otherwise dictate, Gross said.

“It’s hard to put a number on it but for an approximate, the 10-year Treasury is probably distorted by 100 basis points, 1 percent,” Gross said. “It probably would be back to something closer to 4 percent. It’s more obvious in the front end, where the fed funds rate is 25 basis points. Historically that would be more around 1.5 to 2 percent, reflective of inflation we see at the moment.”

The performance of the $237 billion Total Return Fund over the past three years puts it ahead of 65 percent of similarly managed funds, gaining 4.1 percent on average over the period, according to data compiled by Bloomberg.

Pimco, a unit of the Munich-based insurer Allianz SE, manages about $2 trillion in assets.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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