Bill Gross, co-founder and former chief investment officer of Pacific Investment Management Co., has offered advice to the Federal Reserve, recommending an immediate halt to quantitative tightening and a subsequent reduction in interest rates within the next six to 12 months. Speaking on Bloomberg Television, Gross emphasized that continuing quantitative tightening is not the correct philosophy and policy at the current juncture.
Gross stressed the importance of lowering interest rates, stating that real interest rates are currently too high. The benchmark interest rate is at its highest level in over 20 years, and Gross believes that a rate cut is essential to prevent a potential recession. Wall Street is closely monitoring the possibility of a rate cut, with some derivatives traders anticipating a cut as early as March when US policymakers convene on January 31.
Highlighting the significance of true borrowing costs, Gross noted that yields on 10-year inflation-linked bonds, a measure of the actual cost of borrowing, reached a 15-year high of 2.6% in October before settling around 1.8% currently. He expressed a desire to see these yields fall to approximately 1% to 1.5% to safeguard the economy from a significant recession.
In a comprehensive interview, Gross reiterated his belief that stocks are overvalued relative to real yields. He advocated for more conservative investment strategies, favoring certain high-dividend stocks such as banks and tobacco companies, as well as merger and acquisition arbitrage.
Gross also predicted that the yield curve would continue to steepen, reversing the inversion seen in short-term interest rates rising above longer-term yields—an indicator of potential economic downturns. Currently, two-year yields stand about 29 basis points above 10-year rates, a narrowing from over 100 basis points in July.
Gross concluded by emphasizing the challenges capitalism faces when higher returns come with less risk, noting the delicate balance required for a finance-based economy to thrive.
