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Bill Gross: ‘100% Chance’ Fed Will Raise Rates in December

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Friday’s jobs report should give the Federal Reserve a green light to raise interest rates, Bill Gross says.

Gross told Bloomberg Radio and Television that there was a “100% chance” the Fed would raise interest rates in December after jobs surged.

“It’s almost 100% that the yellow light changes in December to bright green,” said Gross, the ex-PIMCO chief investment officer who now manages the Janus Global Unconstrained Bond Fund for Janus Capital.

The economy added 271,000 jobs in October, and the unemployment rate dipped to 5%, from 5.1% in September.

Gross thinks the market is “anticipating a rather quick increase” of 25 basis points.

“I think since before the data the chances in the market of a December hike was about 60% or so,” Gross said. “I think today’s report is going to tilt investors towards the reality of a Fed increase in rates for the first time since 2004.”

With the news of a strong jobs report, Gross does think there could be a problem if everybody reverses a seven-year trade right away.

“Although the Fed has prepared markets for this, I think the markets may not be prepared because hedge funds and even retail investors will look at this headline and use ETFs and maybe even mutual funds as an exit vehicle,” Gross told Bloomberg. “And they all can’t get out at the same time. So it will be interesting to see today and obviously early next week in terms of how quickly they want to hit the exits.”

Dollar Strength

Gross thinks the dollar strength could be something to fear, but that the Fed may not be taking that into consideration.

“I think it’s very much of a concern, something the Fed should think about but probably won’t in December,” he said.

Which may come back to bite the Fed.

“I think they’ll [raise rates],” Gross said. “And then they’ll look around and see how strong that dollar is. But it’s certainly a negative for the global financial system because there are many bets, and much dollar-denominated debt in terms of emerging market corporations and sovereigns will be impacted by this.”

Gross points out that the Fed was cognizant that “a very strong dollar has negative implications for emerging markets” before they took it out of their statement last month.

“I mean, I look at the Mexican peso at the moment, up by 18 ticks, and that’s 1.25%, meaning down 1.25%. And so if that’s typical of emerging markets across the world – and you spoke to the euro, then the dollar is strong and there are implications in terms of balance sheets for many of these countries.” Market Reaction

While the markets tend to overreact to everything, Gross thinks the market is buying the Fed’s slow and gradual idea for raising rates.

“I think they are buying the slow and gradual. I’m buying it. And I think they should buy it,” Gross said.

Gross, who has often talked about the “new neutral” policy rate, thinks it’s capped at 2%, while “historically it’s slower 5%.”

“There shouldn’t be fear and trembling from this type of approach,” Gross said. “It does suggest financial repression for a long, long time. That’s not good for savers, but at least to a certain extent it benefits insurance companies here and pension funds and the small saver than can finally put some money on their savings.”

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