Bill Gross, the one-time so-called bond king who co-founded fixed income giant Pimco, said he sees the possibility of stagflation in the economy and he wouldn't buy stocks aggressively now.
The 77-year-old investor believes that although the Federal Reserve is aiming to combat surging inflationary pressures, it also fears that too many rate hikes could put too much downward pressure on asset prices, causing turmoil in financial markets.
"I think they're sort of handcuffed in terms of what they can do, they went so low. And inflation now is so high on a historical basis that it's going to be difficult raising interest rates too much," Gross said Thursday on CNBC's "Worldwide Exchange" in an interview with Brian Sullivan.
"And I say that simply from the standpoint of a realistic assumption that the stock market was driven, in part, perhaps 30% to 40%, by lower interest rates, and especially lower real interest rates. And to the extent that you now raise them even by 50, to 100 to 150 basis points ... there's a significant impact on financial assets, stocks especially, because the interest rate discount, the forward stream of earnings. So I think they have to be very careful," he said.
If global central banks are stuck in a low interest rate world, that could result in persistent inflation combined with a global economic slowdown, an environment dubbed stagflation, Gross said.
"It perhaps means stagflation. And, you know, inflation above 3% to 4% for some time now," he said.
Consumer prices increased 7.5% from a year ago in January, and the Fed's preferred inflation gauge showed its biggest 12-month increase since 1983.
Fed Chairman Jerome Powell said Wednesday that he still sees a series of quarter-percentage point increases coming, but noted the Russia-Ukraine war has injected uncertainty into the outlook.
Markets have fully priced in a rate increase at the March 15-16 meeting but have decreased expectations for the rest of the year since the Ukraine conflict began, according to CME Group data.
Traders are now pricing in five quarter-percentage point increases that would take the benchmark federal funds rate from its current range of 0%-0.25% to 1.25%-1.5%.
Gross said he chooses to be a cautious stock picker, adding that he holds interests in oil pipelines, partnerships that are tax-free.
"I wouldn't be a buyer of stocks here. I'd simply be a cautious investor," Gross said. "There are ways around this in terms of earning a decent return without buying stocks and taking that outright risk, or selling bonds, which we found in the last few weeks involves significant risk as well."
Gross on Thursday released his memoir "I'm Still Standing: Bond King Bill Gross and the PIMCO Express." The investor managed Pimco's Total Return Fund before leaving to join Janus Henderson in 2014.