Gross: Neutral Fed Funds rate far lower than markets believe

|By:, SA News Editor

"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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