Pacific Investment Management Co.’s Bill Gross said the Federal Reserve will maintain accommodative monetary policy and consider more asset purchases even with the U.S. employment market expanding.
Gross domestic product in the first half of the year will probably be 2 percent to 2.5 percent, which will leave the Fed unsatisfied with growth, Gross, manager of the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.
Employment climbed more than forecast in January and the U.S. jobless rate unexpectedly fell to the lowest in three years. The 243,000 increase in payrolls was the most since April and exceeded all forecasts in a Bloomberg News survey, Labor Department figures showed in Washington. The unemployment rate dropped to 8.3 percent, the lowest since February 2009.
“This is really an extraordinary report,” Gross said. “We’d caution as always that there are many structural headwinds ahead in terms our economic future. But for the moment we are heading up in terms of many of these growth metrics.”
The Fed purchased $2.3 trillion of debt in two rounds of quantitative easing known as QE1 and QE2 as part of its efforts to support the world’s biggest economy. Policy makers last month said they plan to keep their benchmark interest rate near zero until at least the end of 2014. Fed Chairman Ben S. Bernanke said following the central bank’s Jan. 25 meeting that he’s considering another program of debt purchases if it appears the recovery isn’t progressing.
“We should welcome the headline numbers, they are really good, but we should not lose sight that we have structural issues that aren’t being dealt with,” Mohamed A. El-Erian, Pimco’s chief executive officer, said in a separate interview on Bloomberg Television’s “In the Loop” with Betty Liu.
“So far the Fed has been dismissing the short-term data,” said El-Erian, who serves as co-chief investment officer with Pimco founder Gross. “They have been looking beyond the cyclical bounce as secularly the economy is still week.”
Gross boosted the proportion of U.S. government and Treasury debt in the $250 billion Total Return Fund to 30 percent of assets in December, the highest since November 2010. Treasuries with maturities from five- to seven-years have been the focus of Treasury purchases, added Gross, with longer-term debt unattractive due to risk of a pick-up in inflation,
Pimco’s largest fund has returned 6.95 percent in the past year, topping 53 percent of its peers, according to data compiled by Bloomberg. It gained 2.78 percent over the past month, beating 99 percent of his competitors.
“We did think that the Fed would raise its inflationary target to 2 percent,” Gross said. “And that has produced a tremendous bid and higher prices for TIPS.”
The Total Return Fund increased its allocation of Treasury Inflation Protected Securities, or TIPS, to 8 percent, and holdings in municipal bonds to 5 percent, as well as bets on debt of the U.K. and German government, Gross said.
The Federal Open Market Committee in statement of its long-run goals and strategies on Jan. 25 specified a 2 percent goal for inflation, as measured by the annual change in the price index for personal consumption expenditures.
The difference between rates on 10-year notes and TIPS, reflecting the outlook among traders for consumer prices, increased to as much as 2.19 percentage points, the widest since Oct. 28. The spread averaged 2.03 percentage points over the past five years.
The zero-bound interest rate policies embraced by central banks including the Fed may end up killing as opposed to creating credit and developed economies may suffer accordingly, Gross wrote in a monthly investment outlook released two days ago on Newport Beach, California-based Pimco’s website. While recent actions by policy makers provide assurances that short and intermediate U.S. bond yields may not change for years, any potential for price appreciation is limited, he wrote.
Pimco favors Treasuries maturing in five through seven years, with longer-maturity debt more at risk to inflation with the stimulative polices of the world’s central banks, Gross said.
Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.35 trillion of assets as of September.