Bill Gross said the Federal Reserve has waited so long to raise interest rates that any move now may be labeled “too little too late” as market turmoil restricts the room for policy makers to act.
“The ‘too late’ refers to the fact that they may have missed their window of opportunity in early 2015, and the ‘too little’ speaks to my concept of a new neutral policy rate which should be closer to 2 percent nominal, but now cannot be approached without spooking markets,” Gross wrote in an investment outlook Wednesday for Denver-based Janus Capital Group Inc.
Policy makers will gather in Washington Sept. 16-17 to consider raising rates for the first time since 2006. Federal Reserve Bank of Boston President Eric Rosengren said yesterday that uncertainty over inflation and global growth justifies a modest pace of interest-rate increases, regardless of when the central bank begins tightening.
Futures traders are betting the Fed will push back a rate increase. Odds of an increase in September have fallen to 34 percent from 40 percent at the end of July, according to data compiled by Bloomberg. October’s probability is about 46 percent and December’s is 60 percent.
The Fed “seems intent on raising” the federal funds rate “if only to prove that they can begin the journey to ‘normalization,’” Gross wrote. “They should, but their September meeting language must be so careful, that ‘one and done’ represents an increasing possibility –- at least for the next six months.”
Gross, 71, joined Janus almost a year ago after leaving Pacific Investment Management Co., where he once ran the world’s biggest mutual fund. He now manages the $1.5 billion Janus Global Unconstrained Bond Fund. The fund lost 1.9 percent this year through Aug. 31, putting it ahead of 46 percent of peers, according to data compiled by Bloomberg.
Gross, who previously forecast that the Federal Reserve would raise U.S. interest rates this month by 25 basis points, reiterated a warning that the extremely low interest rates of the past years risk distorting capitalism. The only way to fix the economy would be for governments worldwide to start investing to create demand.
Recent market volatility is “but one sign that something may be amiss in the global economy itself -- China notwithstanding,” he wrote.
With global policies discouraging economic expansion, investors should lean on cash or “near cash” instruments such as short-term corporate bonds. He quoted Will Rogers amid the Great Depression, who said he was more concerned about the return of his money rather than the return on it.
“In the long run though, the return of your money will likely not pay for college, health care or retirement liabilities,” Gross wrote. “Finance-based capitalism with its zero-bound interest rates has now produced global imbalances that impair productive growth and with it the chances for ‘old normal’ prosperity.”