Bond guru Bill Gross of Pimco says that the Federal Reserve will not “risk raising rates” until the U.S. has had a year-and-a-half of sustained economic growth, at a solid, four percent rate.
Consider this in light of the fact that he and his colleagues at the money management giant have long said that U.S. growth is about to engage in a long period of a “new normal” where growth rates are much lower, perhaps under 2 percent.
“Nominal GDP must show realistic signs of stabilizing near four percent before the Fed would be willing to risk raising rates. The current embedded cost of U.S. debt markets is close to six percent and nominal GDP must grow within reach of that level if policymakers are to avoid continuing debt deflation in corporate and household balance sheets,” writes Gross in his monthly economic forecast.
The U.S. economy will likely approach four percent nominal growth as early as 2009’s final quarter, says Gross. But, the ability to sustain those levels once inventory rebalancing and fiscal pump-priming effects wear off is “debatable,” he says.
“The Fed will likely require 12 to 18 months of four percent plus nominal growth before abandoning the zero percent benchmark,” writes Gross.
The “negative wealth effect” caused by last year’s stock market crash must be ameliorated to reintegrate the private sector into the Wall Street economy, the investment guru adds.
“Renormalizing risk spreads — stock, investment grade, and high yield bonds among them — is another way to describe this hoped for foundation for future growth,” writes Gross.
Other central banks around the world are, however, starting to tighten credit already.
Norway’s monetary policymakers tightened credit this past week and Australia is poised to make its second interest rate hike next week.
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