Bill Gross Calls Fed's Rate Hike Plot `Likely Exaggerated'

(Bloomberg) -- Don’t believe the Fed.

That’s what Bill Gross, the billionaire bond manager with Janus Henderson Group Plc, says in an investment outlook released Thursday.

“The Fed’s purported three to four hikes this year beginning in March are likely exaggerated,” wrote Gross, who runs the $2.2 billion Janus Henderson Global Unconstrained Bond Fund. “The U.S. and global economies are too highly leveraged to stand more than a 2 percent Fed Funds level in a 2 percent inflationary world.”

The Federal Reserve raised rates by 0.25 percent Wednesday in response to a strong U.S. economy, the first hike since Jerome Powell became chairman last month. The median forecast of members of the Federal Open Market Committee is for more than three hikes for all of this year and three more next year, putting the Fed Funds target rate at 2.125 percent rate by the end of 2018 and 2.875 percent at the end of 2019.

A rate above 2 percent risks destabilizing the U.S. economy, slowing emerging market growth and prompting premature rate hikes by the European Central Bank and other developed economies, Gross said.

“The Fed, under Jerome Powell, hopefully has learned that lesson, and should proceed cautiously, as must his counterparts around the globe,” Gross wrote.

Powell left a positive impression on investors at his first press conference after the rate hike, because he indicated he will set policy based on facts rather than financial theories, according to Gross.

“They saw him as pragmatic rather than academic,” Gross said Thursday in an interview on Bloomberg Television. “They heard him say basically that it was not a day-to-day but a meeting-to-meeting type of decision.”

The U.S. 10-year rate will fluctuate around 3 percent for most of 2018, Gross said. After the Fed decision it spiked above 2.9 percent Wednesday, the highest this month, before dropping later in the day. In January, when rates on the 10-year passed 2.5 percent, Gross pronounced the end of a 35-year bond bull market.

“Still, in my mind, this is a hibernating global bear bond market, not a beast,” Gross wrote in Thursday’s note. “That may come later.”

Gross’s unconstrained fund, which is structured to avoid losses in a rising rate environment, has returned 0.27 percent this year through March 21. It returned an annual average of 2.4 percent over the last three years, outperforming 55 percent of its Bloomberg peers.

--With assistance from Scarlet Fu and Julia Chatterley

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net.

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Vincent Bielski, Alan Mirabella

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