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Pimco's Gross: Fed Not Vigilant Enough

Friday, 22 Feb 2013 | 10:46 AM ET
Gross: Why Fed Isn't 'Vigilant' on Rate Dangers
PIMCO's Bill Gross explains why he thinks the Federal Reserve isn't paying enough attention to the negative consequences of keeping interest rates near zero for an extended period.

Pimco Founder Bill Gross called out the Federal Reserve on its vigilance in three major areas, during a CNBC interview on Friday.

"I don't think the Fed is vigilant in terms of the negative aspects of zero-bound rates," Gross said in an appearance on "Squawk Box" with St. Louis Fed President James Bullard. "I don't think they're vigilant in terms of other central banks and their quantitative easing policies," he added. "I don't they're vigilant in terms of asset prices."

Bullard fought back, responding, "I think we are [vigilant]. We take all those aspects into account."

The Fed has better systems in place to track financial markets, Bullard said, adding, "We certainly talk to the other central banks. We are well aware of what they're doing."

This concept of "vigilance" was sparked by a Tweet that Gross sent on Wednesday morning.

"Bond Vigilantes are no more. Central bankers are the masters of the universe but the question is: Are they vigilant?"

The minutes from the Fed's January meeting were released Wednesday afternoon — sparking concern in the markets about the future of the central bank's bond-buying program.

(Read More: Fed's Bullard: Fed Policy to Stay 'Easy' for 'Long Time')

According to the Fed release, "many participants" expressed concerns about "potential costs and risks arising from further asset purchases."

Echoing that concern in Friday's interview, Gross said, "One of the problems that the Fed has had over the past 10 years is that they have not focused on asset prices."

The Pimco co-CIO argued the Fed's focus on unemployment and inflation — which he acknowledged has been vigilant — was "almost to the asset price-exclusion," causing it to miss the 2008 housing bubble and "the destruction that asset prices can wreak upon an economy, in addition to higher inflation."

Taking issue with those characterizations, Bullard said, "[The] systems in place on tracking what's going on, making sure that we're at least aware of different aspects of financial markets … those systems are a lot better than they were five years ago. And we are trying to have better market intelligence."

But the question about what to do about it, he said, "Is still a very live issue for us and for all central banks."

By CNBC's Matthew J. Belvedere; Follow him on Twitter @Matt_SquawkCNBC

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