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Bill Gross, the renowned bond investor and co-founder of Pimco, is telling the Federal Reserve to stop rising rates. Instead, the Fed “should wait to see if the punch bowl has been sufficiently drained,” Gross wrote in his op-ed for the Financial Times.
The post-COVID era of cheap money created “plenty” Ponzi schemes with Gross mentioning cryptocurrencies and non-fungible tokens (NFTs) as an example.
Among other things, Gross urges the Fed to pay more attention to “the dangerous levels of debt recently acknowledged by the Bank for International Settlements.” He also believes borrowers’ ability to access future equity-based loans “should be severely limited as home prices decline.”
“There could be trouble ahead if the 4.25 to 4.5 per cent nominal fed funds rate and 2 per cent r-star go higher. Too much hidden leverage, too much shadow debt behind closed doors. To paraphrase the Persian poet Omar Khayyam, the moving Fed should pause, then after having done so, should move on,” Gross wrote in his op-ed.
The Fed hiked by 50bps last week to push its benchmark interest rate to the highest level since 2007.
“We still have some ways to go,” Fed Chair Jerome Powell said on Wednesday. “We will stay the course until the job is done.”
He also said that the Fed won’t cut rates until it’s “really confident that inflation is coming down in a sustained way.” And “that will be some time.”
Still, it seems that the bond market isn’t buying Powell’s message that the Fed will stay hawkish for a longer time.
“The market clearly thinks inflation is going to be on a much more desirable path than the Fed is anticipating,” said Lindsey Piegza, chief economist at Stifel Nicolaus & Co, according to Bloomberg.
