'Groundhog Day' Will See Year of Low Rates: Pimco's Gross
The Fed's move to normalize the rate it charges banks to borrow money is not a precursor to an imminent hike of its more closely watched funds rate, Pimco's Bill Gross said.
Rather, the move probably was more of an appeasement toward Fed board members worried about inflation and not indicative of a broader change of philosophy regarding monetary policy, Gross said in a CNBC interview.
"This is the Fed's version of Groundhog Day," he said of the central bank's Thursday announcement that it was hiking the discount rate a quarter point. "Last night we saw the shadow: We have at least six more months of zero-degree interest rates."
- Click here for full video of Gross' comments
Gross, who helps run the world's largest bond fund, said the Fed will not move on its funds rate until the employment picture improves, a trend he thinks is unlikely to take hold until next year.
With economic growth still slow, he said the Fed will make sure the yield curve—in this case the difference between the 0.14 funds rate and the 4.74 percent yield on the 30-year bond—to stay near historic highs.
Holding rates low is especially important as the Fed begins withdrawing its liquidity programs such as buying mortgage-backed securities as well as Treasurys and other agency-backed debt, he said.
"All the market needs is a continuing of the existing (rates) to make lots and lots of money," Gross said.
Rather than a real change in monetary policy, the move on the discount rate the Fed charges banks for emergency overnight lending is more a signal of internal workings at the central bank, he added.
"The timing was a little unusual and surprising. I think it was really a move to appease the three or four hawks on the Fed," Gross said. "They've had their moment and now we'll continue to see this type of spread and this type of Fed funds level going forward."
Gross' colleague at Pimco, co-CEO Mohamed El-Erian, later in a subsequent CNBC interview said the Fed's move on the discount rate was another part of the "new normal" pattern that the firm has ascribed to market and economic conditions. (Click here for video of El-Erian's comments.)
His comments echoed those of other analysts who think the Fed's direction will be sharply influenced by unemployment patterns. Whereas the "normal" or "full" unemployment rate previously had been in the 3 to 5 percent range, El-Erian said that number will drift higher to 7 or 8 percent.
Investors, then, will have to adjust their decisions on what he termed "unknowns" and "known unknowns" that will make the markets unpredictable.
"This is going to be a bumpy time and you've got to maintain optionality," he said.