Pacific Investment Management Co. is diverging with its co-founder and former chief investment officer Bill Gross on whether falling oil prices will delay the Federal Reserve's move to raise interest rates.
In its outlook for 2015, Pimco projects global growth accelerating in a “rising tide”, with lower oil prices helping economies, and the Fed on track to boost borrowing costs. Mr. Gross, who used to run Pimco's biggest fund before his
surprise exit Sept. 26 to join Janus Capital Group Inc., said the U.S. central bank may be constrained by disinflationary pressures after oil prices plunged in recent weeks.
Added to this mix is former Fed Chairman Ben S. Bernanke, who endorsed Pimco's views when he was invited to speak at the firm's internal forecasting session.
Mr. Bernanke suggested policy makers would “look past the drop in headline inflation in the U.S. next year,” focusing on momentum in real growth and core inflation's impact on future monetary policy, Saumil Parikh, a managing director who leads Pimco's quarterly cyclical forum, and group chief investment officer Daniel Ivascyn said in a report posted on the firm's website today.
AFFIRMING PIMCO
“Dr. Bernanke affirmed Pimco's view that the outlook for the U.S. economy in 2015 is incrementally positive,” Messrs. Parikh and Ivascyn wrote. “Despite the drop in oil prices today likely leading to negative headline inflation in early 2015, we expect the Fed will remain on course to raise official policy interest rates in mid-2015, sometime between June and September.”
Pimco, the Newport Beach, Calif.-based manager of the world's largest bond mutual fund, said expansion will climb to about 2.75 percent from about 2.5 percent this year. Economists expect worldwide growth of 2.8 percent in 2015, the average forecast in a Bloomberg survey.
Growth in the world's largest economy will reach 2.75 to 3.25 percent in 2015, up from 2.4 percent in the 12 months through the third quarter of this year, as households' finances and confidence improve, Parikh and Ivascyn said in the report. Economists predict 3 percent growth for the U.S. in 2015 for the full year, according to the average of 94 responses in a Bloomberg survey.
'DOVISH STANCE'
From his new seat at Janus, Mr. Gross predicts the Fed has to take lower oil prices “into consideration.”
“I think that yes, it moves towards a dovish stance relative to what the market expected a few days ago,” he said in a Dec. 12 Bloomberg Surveillance interview with Tom Keene.
Benchmark U.S. oil prices have fallen below $60 a barrel, extending losses today toward the lowest level in five years on concern a supply glut will worsen.
Mr. Gross said with inflation showing no signs of approaching the Fed's 2% target, and “when the U.S. itself is, not deflating but disinflating,” policy makers won't be in a hurry to raise interest rates.
The $163 billion Pimco Total Return Fund (PTTRX) is the biggest bond mutual fund. Mr. Gross managed the fund until his exit, when Scott Mather, Mark Kiesel and Mihir Worah took over.
