Pimco’s Gross: Fed Is Harming, Not Helping Economy
Managing Digital Editor, CNBC International
Pimco's Bill Gross has suggested that the Federal Reserve's current zero percent interest rates are harming the economy rather than helping it.
In his latest investment outlook, the co-chief investment officer of Pimco said the level of "carry" or spreads that banks and investors can make has fallen to such lows that it was now hurting investments, exacerbating the deleveraging process already underway in the economy.
“A lender will not easily lend money to an obese over-indebted borrower — that much is clear — but she will also not extend a check when the yield, carry and return on investment is so low that it cannot compensate for historic business model overheads," Gross, who is also the manager of the world's biggest bond fund said.
Gross cited Bank of America, which has cut more than 1,500 ATMs this year, as an example of financial firms pulling back because of low returns.
Gross suggested the pullback in investment could tip the already-sluggish global economy into a recession (learn more).
"When credit is priced such that carry is no longer as profitable at a customary amount of leverage/risk, then the system will stall, list, or perhaps even tip over," he said. "For the current shipwreck perhaps we have the Fed and other central banks to blame."
Last week, Gross told CNBC the Federal Reserve's(learn more) monetary policy had reached a dead end, but he believed Fed Chairman Ben Bernanke would still announce a third round of quantitative easing (QE) (learn more) in an attempt to spur growth.
The Fed chief last week signaled the central bank was ready to do more for the economy and investors have been waiting to see if the European Central Bank(learn more) will announce a new round of bond buying when it meets on Thursday. (Read More: More Easing Not Needed If Growth Holds Up: Fed's Bullard.)
In his investment outlook, Gross wrote that lowering interest rates traditionally spurred growth, but it wasn't working this time because regulatory changes and caution among households had "thrown a monkey wrench into these models."
Gross reiterated his view that market returns were likely to be disappointing for the rest of the year and that investors should remain cautious.
He said: "In a ‘New Normal’ economy where lenders dance to the Blue Danube instead of the Lindy, how should we move our own feet? Carefully, I suppose, and with recognition that historic returns are just that — historic."