Bill Gross, manager of the world’s biggest bond fund, said the larger-than-forecast increase in U.S. employment last month won’t prompt the Federal Reserve to alter the central bank’s stimulus measures.
“Bernanke and Yellen, and Dudley -- the three musketeers - - have made it obvious that even if unemployment gets to 6.5%, they are going to look around,” Pacific Investment Management Co.’s founder Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Mike McKee. “They are going to look at the participation rate, they are going to look at work rate, they are going to look at productivity -- those things in combination. And if they give themselves an out, if, and here’s the critical point, if inflation is still well contained.”
Payrolls increased more than forecast in February and the jobless rate unexpectedly fell to a more than four-year low of 7.7%. Fed officials have said they will keep their benchmark lending rate near zero as long as unemployment remains above 6.5% and inflation is projected to be no more than 2.5%. They also said during a January meeting they would keep buying $40 billion per month in mortgage bonds and $45 billion in Treasuries.
“Ultimately, wages are the key to sustainable and higher inflation,’ Gross said. “And the Fed knows that as well. It’s certainly true that wages, which are well contained at 1.5% to 2%, are the key to the Fed. And if they for some reason, which I am hard pressed to see the reason, should move up to 2.5% to 3% and threaten that threshold, that’s when the Fed becomes concerned.”
Employment rose 236,000 last month after a revised 119,000 gain in January that was smaller than first estimated, Labor Department figures showed today. The median forecast of 90 economists surveyed by Bloomberg projected an advance of 165,000. The jobless rate dropped from 7.9 percent.
Fed Chairman Ben S. Bernanke told Congress last month that it would take a “substantial improvement” in employment to end the buying. It’s the central bank third program of so-called quantitative easing, or bond buying aimed at keeping long-term rates low to stimulate the housing sector and the economy overall.
Bernanke told Congressional leaders in Washington that the central bank was maintaining its guidance that rates are likely to remain at record lows and that there was no evidence that the Fed’s unprecedented asset purchases risked sparking inflation or creating price bubbles. The Fed has kept its benchmark rate for overnight loans in a range of zero to 0.25% since December 2008.
Gross, who serves as co-chief investment officer of Newport Beach, California-based Pimco, wrote last week in his monthly investment outlook that asset-price irrationality is rising after years of record low benchmark interest rates by the Fed.
Gross reduced his holdings of investment-grade credit securities in his flagship $286 billion Total Return Fund to 9% in January, from 10% in December, according to the latest available data on Pimco’s website. Treasuries are his largest holdings at 30%.
Bernanke also said during in Washington that the central bank may decide to hold bonds on its over $3 trillion balance sheet to maturity and refrain from selling if that is necessary to prevent disruptions in financial markets.
“The Fed will never, will never, sell their portfolio,” said Gross, who reiterated that Pimco is buying Treasury Inflation-Protected Securities, or TIPS, as a way to hedge against the risk that the Fed’s unprecedented monetary stimulus will eventually spark inflation. “The Fed will never sell any bonds.”
Gross has said rising central-bank tolerance of inflation means investors should hedge higher prices by buying TIPS.
A measure of inflation expectations followed by the Fed known as the five-year, five-year forward break-even rate is at 2.8%, up from a low over the last year of 2.37% reached a year ago. The gauge, which uses both inflation protected and nominal Treasuries, projects the expected pace of consumer price increases over a five year period beginning five years from now.
“We simply see, and I think other investors see, central banks on the move -- to call it a race to the bottom -- the same as printing checks -- doing it at a trillion a year,” said Gross, referring to quantitative easing by the Fed, Bank of Japan and the Bank of England.
“Central banks are trying to reflate and that means higher inflation,” Gross said. “It appears all central banks are well content with inflation moving up from 1.5% to 2% to perhaps 2.5% to 3%. A forward looking investor has to play it that way.”
The European Central Bank left its benchmark interest rate at 0.75%, already a record low, at its policy meeting yesterday. While policy makers lowered their economic forecasts, they maintained an outlook for a gradual recovery later this year, and ECB president Mario Draghi signaled that Europe’s economy will have to get worse before he’ll consider more stimulus.
Even with the forecast, Gross said the ECB may take additional action to bolster the economy within two weeks, which is likely to be focused on weakening the value of the euro relative to the U.S. dollar and other currencies.
The ECB has “got potential to do a QE themselves, although that’s far down the line,” Gross said. “But ultimately what they want to do is weaken their currency relative to the dollar and other currencies, so that they can become more competitive.”
The $288 billion Total Return Fund gained 7.2% over the past year, beating 92% of its peers, according to data compiled by Bloomberg.
Pimco, a unit of the Munich-based insurer Allianz SE, managed $2 trillion in assets as of Dec. 31.