Stagnant wage growth allows Fed to maintain ZIRP: says Pimco's Gross

Pacific Investment Management Co.’s Bill Gross said wage growth that is keeping inflation below the Federal Reserve’s target will keep the central bank on course for slow and below-average interest-rate rises.

A government report showed U.S. employers added 288,000 workers in June, exceeding forecasts, and the unemployment rate fell to an almost six-year low of 6.1 percent. Average hourly earnings rose by 0.2 percent for a second month and increased 2 percent during the past 12 months, which compared with an annualized rate of 2.1 percent last month.

“It’s actually the wage number that is critical and the jobs that takes second seat,” Pimco’s Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Mike McKee. “In order to get to the 2 percent inflation target that the Fed wants to get to, assuming a 1 percent productivity number, you are going to have to see wages at 3 percent plus. So the Fed is willing to stay put here.”

The benchmark 10-year Treasury yield rose to the highest in two months after the report, reaching 2.69 percent in New York, according to Bloomberg Bond Trader prices. The two-year note yield increased three basis points, or 0.03 percentage point, to 0.51 percent.

Market rates

“Markets are doing what they are doing today and it’s good to have higher interest rates for those that have cash,” Gross said. Given where Treasury yields are, “what we see is a market that is over-anticipating what the Fed will do. That they think in years 2016, 2017, and 2018 it will be close to 3 percent federal funds rate, but we believe it will be closer to 2 percent as the economy simply can’t stand those levels of levered yields.”

Pimco is betting on a “new neutral” era characterized by global growth converging toward lower, more stable speeds and interest rates that remain below their pre-crisis equilibrium.

The 10-year Treasury yield is likely capped at 3 percent, as yields above those levels would slow the housing market and the pace of growth overall, Gross said. The unemployment rate needs to fall to about 5.5 percent, what he sees as the natural level of unemployment for the U.S., before the Fed is likely to be concerned that growth is at levels that could begin to spark inflation.

The Fed’s favored gauge of inflation, the personal consumption expenditure price index, rose 1.8 percent in May, below the Fed’s 2 percent target.

Fed policy

The Fed, led by Chair Janet Yellen, cut its monthly bond purchases last month by another $10 billion to $35 billion. At the current pace, the quantitative-easing program intended to push down borrowing costs for companies and consumers would end this year. Yellen has said interest rates will stay close to zero for a “considerable time” after the U.S. central bank is done with its bond-buying.

Gross’s Pimco Total Return Fund suffered its 14th straight month of withdrawals in June as the world’s largest bond fund trailed 58 percent of its peers this year so far with a return of 3.25 percent. The formerly top-ranked fund has seen its five- year ranking slip to the 58th percentile, according to data compiled by Bloomberg. Total Return climbed 0.1 percent in the past month, beating 78 percent of peers.

Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.94 trillion in assets as of March 31.

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