Pacific Investment Management Co.’s Bill Gross expects the Federal Reserve to keep borrowing rates at historic lows longer than the central bank has forecast to avoid disrupting leveraged global financial markets.
“When there is a lot of leverage in the economy, a central bank must tread lightly in terms of increasing interest rates,” Gross, manager of the world’s biggest bond fund, said on Bloomberg Television’s “Market Makers” with Erik Schatzker and Sara Eisen. “We think the Fed stays where they are, at 25 basis points, for a long, long time. Perhaps 2016 and beyond.”
The Federal Open Market Committee has keep its target rate for overnight loans between banks at a range of zero to 0.25 percent since December 2008 to help the economy recover from the worst financial crisis since the Great Depression. Fed Chairman Ben S. Bernanke said in June that “a very strong majority of FOMC participants still expect rates to be quite low at the end of 2015.”
Investors should buy Treasury securities maturing in five years or less, shunning longer maturity debt as the Fed transitions away from asset purchases in favor of forward guidance, or announcements on short-term interest rate policies, as their primary monetary easing tool, Gross said.
“The historic raising of interest rates to countermand higher inflationary threats is a thing of the past,” said Gross, the founder and co-chief investment officer of Newport Beach, California-based Pimco.