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Gross: Neutral Fed Funds rate far lower than markets believe

  • "Interest rates have to be lower in a levered economy so that debtors can survive, debt can be reduced as a percentage of GDP, and economies can avoid recessions/depressions," writes Bill Gross, arguing the "neutral" fed funds rate is likely far lower than what past history would suggest. A recent Fed paper suggests the current neutral Fed Funds rate might be as low at 50 basis points currently, and would be just 1.5% if PCE inflation rises to 2% in the future.
  • Bill Dudley mused similarly in a speech in 2012, and Pimco's Saumil Parikh suggested the same one year ago.
  • "I suspect these estimates which average less than 2%, are much closer to financial reality than the average, 4% 'blue dot' estimates of Fed 'participants,' dismissed somewhat by Fed Chair Janet Yellen herself last month," says Gross.
  • Why is this so important? Forward markets have priced in a 4% policy rate around 2020. If it's closer to 2% instead, says Gross, then longer-term bonds - far from being artificially and highly priced - would actually present an attractive value right now.
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Comments (5)
  • sibrahim90
    , contributor
    Comments (2) | Send Message
     
    You first.
    30 Apr, 02:18 PM Reply Like
  • leopardtrader
    , contributor
    Comments (860) | Send Message
     
    I respectfully disagree with Bill on the forward rate of 4%. I believe market is about right & constructive per the forward within 2020. Any further move down in the rate below 2.5% on the 10 year could be viewed as deflationary . FED wont allow this to happen..so the trajectory should be to 4% first but within 2.5~4 for a long time. Current level therefore is a sell for bonds which opposes Bill's call for a buy
    30 Apr, 02:47 PM Reply Like
  • AcCIM412
    , contributor
    Comment (1) | Send Message
     
    Leave it to the Fed to have convinced markets that the implementation of QE is easing but the cessation of it is somehow not tightening. The bond markets know what equity markets have yet to recognize. Peak earnings will be coming down as will valuations this will likely keep rates lower much longer than many expect. Rate normalization will prove too much for our feeble economic recovery.
    30 Apr, 09:25 PM Reply Like
  • notta lackey
    , contributor
    Comments (131) | Send Message
     
    No wonder Gross's funds are performing so poorly of late.
    1 May, 02:21 PM Reply Like
  • gh1616
    , contributor
    Comments (452) | Send Message
     
    Actually Pimco's funds that I follow have done well off the late 2013 lows. Also, most are not run by Gross but a stable of fine fixed income managers like Arnott, Ivascyn, and Kiesel. And for some nice charts look at their Dynamic Credit Income CEF's PDI & PCI. Both have had significant insider buying since the 2013 lows.

     

    AcCIM above said it above......the bond markets know what the equity markets have yet to recognize.
    2 May, 10:18 PM Reply Like
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