Pacific Investment Management Co.’s Bill Gross said he expects the Federal Reserve to be more accommodative under Janet Yellen with the economic expansion sluggish and the risk of deflation.
The U.S. is growing slowly and inflation levels are at “unacceptable, dangerous territory at the moment,” Gross, manager of the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene. The Fed is “moving into forward guidance in a big way, and at some point we may expect to see a nominal GDP target as well as a higher inflation target in the United States.”
Gross, the founder and co-chief investment officer of Newport Beach, California-based Pimco, expects the central bank to add to stimulus even after a report showed today that American employers added more workers to payrolls in October than forecast. Yellen, the Fed vice chairman, was nominated by President Barack Obama to succeed Chairman Ben S. Bernanke when his term ends Jan. 31.
The Federal Open Market Committee will keep its target rate for overnight loans between banks at a range of zero to 0.25 percent into 2016. Gross said. The Fed dropped the rate to a record low in December 2008 to help the economy recover from the worst financial crisis since the Great Depression.
Traders are pricing in a 17 percent probability that the Fed will raise its benchmark overnight rate by its January 2015 meeting, down from a 70.7 percent likelihood on Sept. 5, the day before lower-than-forecast August payroll data was released.
Treasuries lost the most in four months after the Labor Department report, pushing up the yield on the 10-year note 15 basis points, or 0.15 percentage point, to 2.75 percent at 11 a.m. in New York.
Payrolls grew by 204,000 in October even with a 16-day partial government shutdown over budget and debt talks. That’s versus the 120,000 median forecast of 91 economists in a Bloomberg News survey. The unemployment rate rose to 7.3 percent from 7.2 percent.
“It was better than expected, but with a huge asterisk because of all the distortions,” Mohamed A. El-Erian, Pimco’s chief executive and co-chief investment officer, said in a separate Bloomberg Television interview. “Because it questions the Fed commitment to continue support these markets, good news becomes bad news for the markets.”
The U.S. economy will grow 1.6 percent in 2013, according to 89 economists surveyed by Bloomberg, after growing 2.66 percent over the past 20 years.
Fed policy makers said last week they needed to see more evidence the economy will continue to improve before they trim $85 billion in monthly purchases of Treasury and mortgage debt. Fiscal policy “is restraining economic growth,” the FOMC said Oct. 30 at the end of a two-day meeting in Washington.
Gross has recommended investors purchase shorter-term Treasuries as the Fed weighs tapering quantitative easing and the market underestimates how long it will then take the central bank to begin raising interest rates.
The $248 billion Pimco Total Return Fund managed by Gross has declined 0.93 percent this year, trailing 49 percent of rivals, according to data compiled by Bloomberg. Over the past five years, the fund has advanced 7.9 percent, beating 72 percent of peers.