Fixed Income 2013

Bill Gross: Fed will have to taper at some point

Andrew Harrer | Bloomberg | Getty Images

Bill Gross, the manager of the world's largest bond fund, has said the Federal Reserve will have to taper its monetary stimulus, despite delaying the move last month.

The managing director of PIMCO correctly predicted in September that the bond market was overestimating the possibility of Fed tapering.

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But in his latest investment outlook, Gross wrote: "The Fed will have to taper, cease and then desist someday."

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"They can't just keep adding $1 trillion to their balance sheet every year without something negative happening—either accelerating inflation, a tanking dollar or a continued unwillingness on the part of corporations to invest because of the resultant low and unacceptable returns on investment."

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Quantitative easing "has to die sometime," he added.

Gross said that once it ends, the focus will shift back to the Fed funds rate and the central bank's forward guidance, and that is when thing will get interesting.

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"The critical question to ask in terms of the level and eventual upward guide path of the policy rate is how high a rate can a levered economy stand? How much wood can a woodchuck chuck? How high a rate can a homebuyer handle?" he said.

Gross pointed out that an increase of 125 basis points in the 30-year mortgage rate over the past six to 12 months seems to have stopped housing starts and ended mortgage refinancings.

As a result, he said investors should expect the Fed to keep its benchmark rate low for a very long time.

The "Fed funds will then stay lower than expected for a long, long time," he said. "Right now the market [and the Fed forecasts] expects Fed funds to be 1 percent higher by late 2015 and 1 percent higher still by December 2016. Bet against that."

Later appearing on CNBC's "Street Signs," Gross was asked to comment on Brazil's economy. Though the emerging market had been a growth engine in recent years, it now faces a possible credit crisis following news that OGX Petróleo e Gas Participações SA missed a $45 million interest payment Tuesday. The miss moves the debt-laden Brazilian oil producer closer to the largest Latin American corporate debt default ever.

To Gross, Brazil has myriad problems, from high pension payments to infrastructure issues.

"It's not the paradise that investors thought two or three years ago and the future place of the World Cup and the Olympics," he said.

—By CNBC's Deep Bagchee. Follow him on Twitter: @DeepBagchee

CNBC's Drew Sandholm contributed to this report. Follow him on Twitter @DrewSandholm