Bill Gross has some advice for the Federal Reserve: stop winding down its balance sheet now, and start cutting interest rates in coming months to avoid recession.
“I would stop quantitative tightening,” the co-founder and former chief investment officer of Pacific Investment Management Co. said on Bloomberg Television when asked what he would do differently if he were leading the Fed. “That is just not a correct philosophy and policy at this point in time to continue to tighten quantitatively.”
Gross added that the central bank should lower interest rates over the next six to 12 months.
Wall Street is keenly focused on when exactly the Fed will start trimming the benchmark interest rate, which is at the highest in over 20 years. Some derivatives traders are still holding out hope for a cut as soon as March, US policymakers next meet on Jan. 31.
“Real interest rates are simply too high,” Gross added.
Yields on 10-year inflation-linked bonds, which are viewed as a measure of the true cost of borrowing, surged to a 15-year high of 2.6% in October, before sliding down to about 1.8%, currently. Gross said he’d like to see the yields fall to about 1% to 1.5%, so that “the economy will not go into a significant recession.”
In a wide ranging interview, Gross reiterated some of his previous calls, including that stocks are too expensive relative to the level of real yields.
Instead of high-flying tech shares, he prefers more conservative investment strategies, including certain high-dividend stocks like banks and tobacco companies, as well as merger and acquisition arbitrage.
He also expects the yield curve will continue to steepen, reversing the so-called inversion. An inversion occurs when short-term interest rates rise above longer-term yields — a phenomenon that is widely perceived as a leading indicator for potential economic downturns.
At about 4.4%, two-year yields are about 29 basis points above 10-year rates. That difference has narrowed from more than 100 basis points in July.
“Capitalism and a finance-based economy, which is what we have, cannot really do well, when you can get a higher return for less risk,” said Gross.
This article was provided by Bloomberg News.