Did the Federal Reserve make the right call?
During a webcast from Janus, legendary bond fund manager Bill Gross commented on the Fed’s mid-March meeting where officials left interest rates unchanged and lowered its projected path for increases this year.
“Boy, it was a surprise I think to many of us,” Gross said. “A little more dovish than even the doves considered Yellen to be.”
In a statement at the conclusion of their two-day meeting last week, Federal Open Market Committee officials cited the potential impact of weaker global growth and financial market turmoil on the U.S. economy as reasons for not raising borrowing costs.
The Fed’s dovish statement should be encouraging for risk assets in the short term, according to Gross.
“Risk assets were encouraged by the ‘promise’ of liquidity going forward and the Fed suggesting that there’s not an interest rate hike in April and maybe not for the next several quarters,” Gross said. “I think, short term – and let me emphasize short term – that markets and especially risk assets are encouraged. I think on a longer term basis there are structural problems with what’s being done.”
While there are short-term benefits for risk assets, zero-bound or negative rates will affect savers’ ability to generate returns and threaten business models long term, Gross said.
“The closeness to the zero bound basically robs savers of their ability to earn money and threatens business models such as insurance companies and banks in terms of their margins and certainly pension funds in terms of their ability to earn money,” he said, adding, “The necessity to keep interest rates low in order to support markets has long-term consequences, and I’m not so sure the Fed appreciates that.”
While the Fed may not seem concerned, Gross said, investors should be concerned about being at zero-bound rates for a long period of time.
“There are negative consequences down the road, and I think we’ve seen that in Japan, because Japan’s been at these levels for a long, long time and failed to generate inflation or growth, and there are negative consequences in euro-land as well.”