US economic growth is likely to remain weak in Y 2010, forcing the US Federal Reserve to keep short term interest rates at current ultra low levels throughout the year and even into early 2011, influential bond fund manager Bill Gross said last Wednesday.

 

Mr. Gross runs Pacific Investment Management Co., or Pimco, the world’s biggest bond fund, and he sees job creation in the United States poised to resume soon, but said it would likely run at an average of 100,000 a month in the early stages, too small to meaningfully bring down the unemployment rate.

The US Fed will keep rates at rock bottom levels until the nation shows “stable and substantial growth,” he told the Reuters Investment Outlook Summit in New York, via a teleconferencing TV link from his headquarters in Newport Beach, California.

Because even a very small increase interest rates could cause the market to expect much greater hikes, the US central bank will be forced to act very cautiously, said Gross, who as Pimco’s co-chief investment officer helps oversee more than US$940B in assets.

“If they move by even 25 or 50 basis pts, the market will interpret that as 200, 300, 400 to come,” he said. “And so the Fed is cemented (at ultra-low levels) until the economy can stand ‘the shock’ of higher interest rates that signal would produce.”

Gross, in a follow-up email message, said there is a possibility the US central bank could keep interest rates near the current levels near Zero % even into early 2011. There is a 20% chance of that, he said, adding, “That’s a really seat-of-the pants, flying blindfold estimate.”

Gross highlighted to the Summit that Goldman Sachs recently told clients that the Fed could keep its benchmark federal funds rate, the rate that banks charge each other for overnight lending, close to Zero percent quite possibly throughout 2011.

At the Fed’s policy-setting meeting this week, Gross said that while some of his Pimco colleagues believe there could be some language changes in its accompanying statement at the close on the meeting, “That’s not my view.”

“The Fed has Hawks and Doves. The Doves have won the battle up until this point and they think they continue to win the battle because the Doves have the major players, including the Fed chairman,” Gross said.

Policy makers known as “Hawks” are those who are most emphasize the need to control inflation, a stance that favors tighter monetary policy, while doves are those who worry more about the need to stimulate the economy, prompting a call for looser monetary policy.

Mr. Gross added that he is not entirely convinced that the Fed’s quantitative easing, extraordinary measures designed to stimulate the economy in addition to its near Zero % interest rates, will end on schedule.

“There are so many uncertainties and I think the Fed recognizes that, and not just from the standpoint of the policy rate but the standpoint of quantitative easing,” he said.

After this year’s rally, US equities are now priced at levels that anticipate a stronger economic recovery than Pimco’s baseline outlook would suggest, he added.

The long end of the US Treasury yield curve is vulnerable to the gradual wind down of the Fed’s quantitative easing measures expected in the New Year, he said.—Paul A. Ebeling, Jnr. www.livetradingnews.com