Bill Gross, the former chief investment officer of the US bond giant Pacific Investment Management Corporation (PIMCO) and a famous investor known as the "old bond king", recently criticized the way the Federal Reserve has managed interest rates and inflation in the past few years.
He suggested that the Federal Reserve stop reducing its balance sheet size now and start lowering interest rates in the coming months to avoid an economic recession.
When asked in a media interview if he had confidence in the US economy and its leaders, Gross's answer was negative.
"In the past three, four, or five years, the Federal Reserve has not done well in trying to find a magical federal funds rate that neither exacerbates inflation nor generates deflation," Gross said.
"I will stop quantitative tightening," Gross said when asked what different approach the Federal Reserve would take if he were to lead it. "Continuing quantitative tightening at this point in time is not the right concept and policy."
Gross added that the Federal Reserve should lower interest rates within the next 6 to 12 months.
At present, the benchmark interest rate in the United States is at its highest level in over 20 years, and Wall Street is closely monitoring when the Federal Reserve will start lowering interest rates. Some derivatives traders still hold hope for a rate cut as early as March. Federal Reserve officials will hold their next meeting on January 31st.
"The real interest rate is really too high," Gross said.
The yield of 10-year inflation linked bonds (considered an indicator of real borrowing costs) surged to a 15 year high of 2.6% in October last year, and then fell back to around 1.8% currently. Gross said he hopes to see the yield drop to around 1% to 1.5%, so that the economy will not fall into a severe recession.
Stocks are relatively expensive
In this interview, Gross also reiterated some of his previous views, including that stocks are too expensive relative to actual yield levels.
He also expects that the yield curve will continue to steep, reversing the so-called inversion. When the short-term yield is higher than the long-term yield, inversion occurs - a phenomenon commonly seen as a leading indicator of potential economic recession.
At present, the yield of US two-year treasury bond is about 4.4%, about 29 basis points lower than the yield of 10-year treasury bond. This spread has narrowed from over 100 basis points in July last year.
"When you can achieve higher returns with lower risk, our existing finance based economy cannot truly develop well," Gross said.