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

“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.”

–Related on ThinkAdvisor:

• Yellen Signals Solid Economy Would Spur December Rate Hike
• Bill Gross: Flat Yield Curve Crushes Capitalism