Bill Gross of Janus Capital spoke with Bloomberg Television’s Erik Schatzker about today’s Federal Open Market Committee statement and the outlook for Federal Reserve policy, global bond markets and Pacific Investment Management Co.’s move to hire former Fed Chairman Ben S. Bernanke as an adviser.
On Pimco hiring Bernanke, Gross said: “Obviously it’s a public relations effort….To be able to hook up with Ben Bernanke, I think it is. And that was one of the reasons why we did it with Alan Greenspan [when I was at Pimco], but we found out that there were some very positive benefits to it as well.”
When asked whether he would hire him if he could, Gross said: “I don’t think so. I have moved on in terms of my personal experience, and I am more than glad to read his weekly blogs, and get information that way and to spend the rest of my time in markets.”
Gross said he sees the Fed raising rates by 25 basis points: “They want to prove that they’re not healthy, but that they can get out of bed and stand on their own two legs. And that means a 25-basis point increase perhaps in September or December, but from that point forward, and that is the key, how quickly will they move back to what we know as a new neutral policy rate.”
Bill Gross interview video and transcript below
ERIK SCHATZKER: I have been waiting a long time to come and visit Bill Gross here in Newport Beach, and finally the moment has arrived. Bill, thank you.
[drizzle]BILL GROSS: You’re welcome.
SCHATZKER: Let’s begin with the obvious. Today was an important day for the bond market because we got a Fed statement. Any surprises for you in the Fed statement?
GROSS: Not much. They spoke to transitory — transitorily low inflation, same thing in terms of growth. We had a GDP number today at —
SCHATZKER: Kind of a hideous GDP number.
GROSS: Yes, 0.2 percent, actually real final sales, which scratches out inventories, was a minus 0.5 percent, so really hideous into that negative number. But I don’t think the statement suggests too much difference in terms of their attitude going forward. They think inflation is going higher to, hopefully to two percent. They think real GDP is in a two to three percent zone. And so they are going to sit and wait until they get there.
SCHATZKER: So what conclusions then do you draw about the timing of a rate increase right now?
GROSS: Well I think it’s — it’s off in June, as some would say if we get a strong employment report a week from now that perhaps it is back on, but I think it is off. And I think perhaps they simply want to get off the dime. They want to prove that they’re not healthy, but that they can get out of bed and stand on their own two legs. And that means a 25-basis point increase perhaps in September or December, but from that point forward, and that is the key, how quickly will they move back to what we know as a new neutral policy rate.
SCHATZKER: And what would that be?
GROSS: Well to my way of thinking that it would be two percent nominal, then zero percent real. And now the old standard, the John Taylor, Taylor Rule standard, was basically a four percent nominal rate and a two percent real rate. Just some of the Fed members, a lot of the dots, those blue dots, basically suggest that three and three quarters to four percent nominal is still the number, but I — I hesitate.
SCHATZKER: So as far as June is concerned, you don’t read anything into the FOMC removing that sentence from the previous two statements about an increase in the Fed’s funds target being unlikely at the next meeting?
GROSS: I don’t think so. They were moving in that direction. I mean they had a transition four or five times in terms of the language. And I think they want the language out of there in terms of time dependency. They want to be data dependent, and the data to a considerable extent revolves around employment, labor and inflation.
SCHATZKER: Do you think it’s important for Janet Yellen and her colleagues to be able to prove that, in your words, they can get out of bed and stand on their own two feet?
GROSS: I think so. And I think it’s important from the standpoint of the health of a capitalistic economy, which is something that hasn’t been discussed a lot in terms of Fed meetings, but I — I think low interest rates can have negatives as well as positives. I mean the Fed has always sensed that the lower the rate, the better in terms of stimulating the economy, capital markets, stocks, the flow down in terms of wealth, et cetera, et cetera, but at some point when rates are so low, you keep the (INAUDIBLE) on big corporations because they borrow so cheaply.
You — you basically promote a situation in which business models, pension funds, insurance companies, banks can’t earn what they are supposed to earn. And so at some point, capitalism at the margin, not totally, but at the margin begins to break down. And so I think it is important that they move back up to a, and at least a semblance of a healthy Fed funds rate.
SCHATZKER: No zombies in a healthy capitalist economy.
GROSS: There are always zombies. And there were a lot of zombies in Japan, by the way, which proves the example to some extent. I mean they’re the only real modern economy that has experienced a high level of debt with zero percent interest rates for a long time. And — and, as we know, they’re not really doing very well.
SCHATZKER: Bill, Ben Bernanke is going to work as an advisor to your former colleagues, news of the day. Why is that a good move for PIMCO?
GROSS: Well when I was with PIMCO we hooked up with Alan Greenspan.
SCHATZKER: I remember, 2007.
GROSS: Sure. And he came for four or five years every quarter, and we had discussions, and dinners and so on. And I think it’s a — I think it’s a good move from — from that standpoint. Obviously it’s a public relations effort.
SCHATZKER: (INAUDIBLE). It’s a public relations effort?
GROSS: Well of course, to be able to hook up with Ben Bernanke, I think it is. And that was one of the reasons, one of the reasons why we did it with Alan Greenspan, but we found out that there were some very positive benefits to it as well.
SCHATZKER: Like what? What kind of value can a former Fed chairman provide?
GROSS: Well he can provide, and she can provide at some point in the future, Janet Yellen, —
SCHATZKER: Yes. That’s true, will be a former Fed chairman.
GROSS: And they can provide, if anything, a sense of what the — the Fed thinks in terms of how they approach a forward-looking problem such as inflation too low, or the real economy too low. And so that’s helpful. It doesn’t mean you got to buy in, and I don’t buy into the current