Bad hits from the 1980s aside, the Federal Reserve’s latest round of monetary stimulus will enable Treasury to issue debt for no cost, says PIMCO bond guru Bill Gross.
“What really happens, and this is critically important, is that the Treasury issues bonds and the Fed buys them and then it remits interest to the Treasury,” Bill Gross (left), a PIMCO co-founder and portfolio manager, told Bloomberg Television on Friday. “It basically means that the Treasury is issuing debt for free … Inflation is one of the complications.”
Here, in Gross’ own words, are his thoughts about the current state of the U.S. bond market:
Gross on Wednesday’s move by the Federal Reserve:
“Basically, the Fed’s policy has been, and other central bank’s policies have been, over the past few years to write checks. Ben Bernanke, back in 2002, when he was the governor, basically told us in the first one or two pages of his scripted speech that the quantitative maneuvers that he anticipated going forward were essentially costless. Those were his words. He is correct. This is critical and important, what really happens is that the Treasury issues funds, the Fed buys them and then it remits interest to the Treasury quarterly or over time. It basically means that the Treasury is issuing debt for free.”
On what the economic complications will be:
“There are those, and we are amongst them, that believe that inflation is one of the complications. It has not happened yet. We are well below 2%. The Fed is comforted by that. Ultimately, if you write checks for free and if it is costless to finance a fiscal policy that is well into a deficit figures, then, yes, that is an inflationary moment to the extent that the private sector gets some animal spirits and takes that bait.”
On whether he and Mohamed El-Erian have been invited to Washington: