Weak jobs report won't change Fed taper plan, Gross says

Central bank 'wants to be out' of the bond-buying business but still won't raise rates

Jan 10, 2014 @ 11:52 am (Updated 1:00 pm) EST

bill gross, pimco, federal reserve, interest rates, taper, unemployment, jobless report
(Bloomberg News)

Pacific Investment Management Co.'s Bill Gross said the Federal Reserve is on course to end its bond buying this year, even though job growth is at the slowest pace since January 2011.

“I do believe that by the end of 2014, the Fed wants to be out,” Mr. Gross said in a radio interview, referring to the central bank's purchases in its quantitative-easing program. Yet “by the end of 2015, they will not have raised interest rates.”

Payrolls in December increased at the slowest pace since January 2011, indicating a pause in the recent strength of the U.S. labor market that may partly reflect the effects of bad weather. The 74,000 gain in payrolls, less than the most pessimistic projection in a Bloomberg survey, followed a revised 241,000 advance the prior month, Labor Department figures show.

The benchmark 10-year Treasury note yield decreased six basis points or 0.06 percentage points, to 2.9%, Bloomberg Bond Trader data showed. The 2.75% note due in November 2023 added 17/32, or $5.31 per $1,000 face amount, to 98 22/32. The yield climbed to 3.05% on Jan. 2, the highest since July 2011.

The Fed cut monthly bond purchases to $75 billion starting in January, from $85 billion, citing improvement in the labor market. Fed officials will gather Jan. 28-29 for the next policy meeting.

FORWARD GUIDANCE

“The most certainty in terms of current prices and future policy lies in the Fed and its forward guidance that we've received — that they will not change the fed funds rate until after the taper is over,” Mr. Gross said in the interview. “After that time point, there will be a considerable period of time in which they will then decide whether or not they will begin to move upward. In 2016, we still see a Fed funds rate at close to 25 basis points.”

The Federal Open Market Committee said last month it will keep the benchmark federal funds rate near zero “well past the time” unemployment falls below 6.5%, especially if projected inflation continues to run below the 2% target. The bond tapering, combined with forward guidance support, were “intended to keep the level of accommodation the same overall and to push the economy forward,” Fed Chairman Ben S. Bernanke told reporters on Dec. 18.

Since lowering the benchmark interest rate to near zero in December 2008, Fed officials have relied on bond buying and forward guidance about their plans to try to spur growth. The Fed's bond buying, which began in 2008, has distorted bond yields, pushing them to levels that are below where economic conditions would otherwise dictate, Mr. Gross said.

“It's hard to put a number on it but for an approximate, the 10-year Treasury is probably distorted by 100 basis points, 1%,” Mr. Gross said. “It probably would be back to something closer to 4%. It's more obvious in the front end, where the fed funds rate is 25 basis points. Historically, that would be more around 1.5% to 2%, reflective of inflation we see at the moment.”

The performance of the $237 billion Total Return Fund over the past three years puts it ahead of 65% of similarly managed funds, gaining 4.1% on average over the period, according to data compiled by Bloomberg. Pimco, a unit of the Munich-based insurer Allianz SE, manages about $2 trillion in assets.

(Bloomberg News)

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