Gross: Fed Will Move in September

Aug 7 2015 | 3:27pm ET

Janus Capital’s Bill Gross believes the U.S. Federal Reserve will raise interest rates by 25 basis points when it meets in September.

Gross made the remarks during a radio interview with Bloomberg's Tom Keene. 

According to Gross, opinion on the Fed’s Open Market Committee is not unanimous, but the majority of members think September is the right time to start normalizing U.S. monetary policy. Interest rates in the U.S. have been near zero since the financial crisis, leading to what many economists and finance professionals believe are large, systemic distortions in global markets. 

"There have some pretty strong signals from Lockhart and others that September is the number,” Gross said in the interview, which occurred after today’s jobs report release. The Fed is “mentally committed to moving before year end," he added. 

When asked about the lack of wage inflation, which was reinforced by the jobs report data, Gross noted that the lack of payroll gains is “a significant break from normal thinking, from Taylor model thinking in which by this time you would have expected some wage growth.”

The Fed is widely considered to be watching growth in average hourly earnings to guide when it starts to hike rates. The metric has been a good indicator of Fed moves in the past. 

While predicting a 25 basis point move next month, Gross also cautioned that a larger step of 0.50% would spook investors. Looking out past the first hike, Gross believes the market’s reaction will be driven by “their language, and by how much, and what the forward curve assumes.”

“In two years, the Fed funds rate is assumed to be one and half percent,” Gross said, referring to the predicted interest rates as suggested by futures contracts. “And so if we get there in 2017, there should be no market reaction whatsoever because it's priced into the forward curve. Anything less is positive for the bond market…and anything more is negative.”

Gross also touched on global deflationary pressures, noting that the collapse in commodity prices hasn’t just brought the CRB Index to a cyclical low, but a level lower than that reached during the 2008 financial crisis nadir.

According to Gross, the commodity market is a strong metric for global economic health because it is subject to actual demand and supply, and is essentially a real-time indicator. And right now, according to Gross, that indicator is flashing a warning that deflation is approaching.

Gross left Pacific Investment Management, or PIMCO, last year in a reshuffle that also saw his co-manager on PIMCO’s Total Return Fund, Mohamed el-Erian, depart what was at the time the world’s largest bond fund. Gross now manages the $1.5 billion Global Unconstrained Fund for Janus Capital Group.

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