Pimco's Gross blasts Fed
Bond fund manager says central bank's stance risks inflation, weaker dollar.
April 10, 2002: 3:07 PM EDT
NEW YORK (Reuters) - The manager of the world's biggest bond fund said Wednesday the Fed will have to keep benchmark interest rates lower for longer than usual to avoid disrupting Corporate America's binge on cheap short-term rates.
Bill Gross, who oversees the $250 billion Pacific Investment Management Co. bond fund, said such a move would run the risk of higher inflation in future years and weaken the dollar. Bond investors should favor short-term Treasurys and keep portfolio duration close to benchmark indexes, Gross wrote in his monthly investment outlook, posted on the Pimco Web site.
Last month he berated General Electric Co. (GE: up $0.59 to $37.04, Research, Estimates) for its heavy reliance on short-term debt in the commercial paper market and urged companies to be more forthcoming in explaining their strategies to investors, sending GE's stock tumbling.
Gross said companies' use of interest rate swaps -- derivatives that allow firms to tweak their interest rate exposure -- to switch long-term debt issuance back to cheaper short-term rates has made it hard for the Fed to significantly raise benchmark rates. Currently the federal funds rate stands at a four-decade low of 1.75 percent.
"It means that short-term rates are even more critical to the profitability of Corporate America, to the level of the stock market, to the growth rate of the American economy than ever before," he said.
"It means that Alan Greenspan dare not raise interest rates too much or risk sinking the stock market and the economy once again. It means that, because his ability to raise short rates is limited, ... ultimately inflation may be higher than it otherwise would be," Gross said.
The Fed likely would hold rates steady after taking them back to about 3 percent to remove the "emergency reductions" after Sept. 11, Gross said.
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With interest rate swaps, companies commonly "swap" debt they sell at fixed rates to cheaper floating rates to reduce their borrowing costs. Firms become vulnerable once benchmark interest rates begin to rise, but they could choose then to swap their debt again to fixed rates to protect themselves.
Gross said that with so many companies exposed to short-term rates through swaps, "the systemic risk is anything but de minimus."
A few months ago Gross said that if the Fed wanted to help give the economy a kick, it should raise short-term rates to force bond investors to shift funds into longer-dated issues. Some economists regarded his argument as counterintuitive.
A shift to long-term Treasurys would keep mortgage rates low and spur more refinancing activity, which many economists believe provided consumers with crucial cash and helped to keep last year's recession one of the mildest in the past 60 years. |
