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Gross, El-Erian Disagree on Fed Rate Hike

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In a blog posted Thursday, Mohamed El-Erian of Allianz SE said that the Federal Reserve would look at Friday’s jobs report before deciding whether it would raise interest rates in September. If it did so, that would mark the first interest rate increase in nine years.

In an interview today with Reuters, El-Erian said the Fed will now wait for the August jobs report — scheduled to be released on Sept. 4 — before deciding on a “September rate hike.” The reason isn’t jobs. “While job creation continues at a solid pace,” Reuters quoted El-Erian, “wage growth remains frustratingly tepid.”

But El-Erian’s former colleague at PIMCO, Bill Gross, said after the jobs report was released Friday that he saw the Fed raising interest rates in September by “probably 25 or 50 basis points — probably 25. I hope; 50 would scare the market.”

Why does he see such an increase then? “There have some pretty strong signals from Lockhart,” meaning Atlanta Fed president and FOMC member Dennis Lockhart, “and others that September is the number,” Gross told Bloomberg Radio’s Tom Keene in a telephone interview. “And I think it’s because of financial conditions,” Gross continued, “we know that inflation is close to zero. Yes, unemployment is steady, but low.”

Gross said the Fed is “almost mentally committed to moving before year end,” and said a rate increase in September is “not a unanimous opinion, but it’s a majority opinion at the moment.”

Why? “I think the Fed will move because of financial conditions … It’s a situation in which I think central banks are beginning to recognize that there are negatives to low interest rates, as opposed to positives.” Moreover, he said, “I think they would simply want to get off zero and show the world that a move toward normalization is possible.”

How will the markets react when the Fed raises rates as he expects in September? “It depends on their language, and by how much and what the forward curve assumes,” Gross answered. Gross said his research shows that “investors expect funds to be at 1.5% in two years, so anything less is a positive for a bull market.”

Gross did address the issue of wages when Keene asked, “there is just no wage inflation. Where is it?”  Gross responded, “Well, it’s in Brazil, unfortunately, but it’s not in the developed countries. And that, I think, is a significant break from normal thinking, from Taylor model thinking [referring to economist John Taylor] in which by this time you would have expected some wage growth.”

The Bureau of Labor Statistics reported Friday that the economy added 215,000 nonfarm jobs in July, leaving the unemployment rate unchanged at 5.3%; the number of unemployed people remained level as well at 8.2 million. Job gains occurred, BLS reported, in retail trade, health care, professional and technical services and in the ‘financial activities’ sector, which includes the insurance, banking, real estate and securities industries.

In his blog for Bloomberg View, El-Erian wrote Thursday that “The Fed doesn’t need a super strong jobs report in order to act in September. What it needs is a relatively solid assurance that the labor market, having grown by more than 2.9 million jobs during the past 12 months, retains its firm footing.”

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