Pacific Investment Management Co.’s Bill Gross said the pace of employment growth in the U.S. means the Federal Reserve will continue to wind down bond purchases and then consider raising interest rates.
Payrolls rose 192,000 after a 197,000 gain in February that was larger than first estimated, the Labor Department reported today in Washington. The median forecast in a Bloomberg survey of economists projected a 200,000 gain. Private employment, which excludes government jobs, surpassed the pre-recession peak for the first time.
“Two-hundred thousand jobs plus or minus is probably reflective of 2.5 percent growth in the short term,” Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Michael McKee. The Fed’s quantitative easing should “end at the end of October or November. Then, as Janet Yellen has suggested, six months plus or minus, we can begin to talk about higher policy rates.”
Two-year Treasury note yields surged the most since 2011 on March 19, after the completion of a two-day Federal Open Market Committee, as central bank officials increased their projections for the main policy rate and Chair Yellen signaled during a press conference that a rate increase may come six month after the central bank completes its bond buying.
Policy makers have cut their monthly debt buying by $10 billion increments at each of their last three meetings to $55 billion. They probably will continue with reductions at that pace and end the program in October, economists said in a Bloomberg News survey last month.
The current growth pace is “better in the short-term than the new normal of 2 percent that we’ve had for the last four or five years,” Gross said. “But it is certainly not reflective of where we were before, which was 3 to 4 percent and a nominal GDP growth rate of 6 to 7 percent. The new normal in in place.”
Mohamed El-Erian, who had previously served as co-chief investment officer with Gross, coined the term new normal to describe what Newport Beach, California-based Pimco forecasts is an era of prolonged below-average global economic growth and investment returns.
The Labor Department’s survey of households showed about a half million people entered the labor force, and at the same time, almost as many found work. The figures also showed an increase in the number of people employed part-time. The so-called participation rate, which indicates the share of working-age people in the labor force, increased to 63.2 percent from 63 percent a month earlier.
“The critical thing is what is the neutral policy rate in a new normal type of economy,” Gross said, referring to the long-run equilibrium for the federal funds rate. It’s at about “1 to 1.5 percent as opposed to the old 2 to 2.5 percent.”
Gross’s $232 billion Total Return Fund (PTTRX), the world’s largest bond mutual fund, has underperformed most comparable funds this year after betting that short-term securities would outperform long-maturity debt.
“The past month hasn’t been a good one,” Gross said. “When Janet Yellen came out with her ‘six month’ remark and the ’blue dots’ from Fed participants suggested either March or June of 2015 as a starting point, then that to us was a little bit early in terms of how we were positioned.”
The fund has lost 0.92 percent over one month, ranking it in the bottom 6 percentile versus other comparable funds, according to data compiled by Bloomberg. That has helped to drop the average annual return over five years to 6.9 percent, placing it in the 55 percentile.
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