Bond guru Bill Gross believes that Ben Bernanke was on target last week with his remarks about bringing an end to quantitative easing, but he also says that the Federal Reserve chairman’s view of the economy is fogged up by a misunderstanding about what’s holding the U.S. economy back.
“We agree that QE must end. It has distorted incentives and inflated asset prices to artificial levels. But we think the Fed’s plan may be too hasty,” PIMCO’s founder and co-CIO wrote in a comment, “The Fog That’s Yet to Lift,” which originally appeared in the online edition of Barron’s on Tuesday.
The fog, according to Gross, is Bernanke’s mistaken belief that the economy is troubled by traditionally cyclical impediments such as fiscal austerity and rising home prices. But Bernanke is failing to see the structural problems that are truly plaguing the economy, Gross says.
“Wages continue to be dampened by globalization,” he writes. “Demographic trends, notably the aging of our society and the retirement of the Baby Boomers, will lead to a lower level of consumer demand. And then there’s the race against the machine; technology continues to eliminate jobs.”
Bernanke didn’t mention these factors, but they are what will prevent unemployment from reaching the 7% threshold next year, Gross said. He added that the Fed’s inflation views “may be the foggiest of all” because the U.S. is nowhere near the desired 2% inflation rate and is more likely headed into deflationary territory — and “Bernanke has longstanding and deep concerns about deflation.”
Consumer prices rose only 1.1% in the 12 months through April, a 53-year low, according to a June 12 Bloomberg news report.