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Bill Gross: Fed in Neutral Until December

Tuesday, 15 Jul 2008 11:21 AM

Bond expert Bill Gross, founder of Pimco, says that the Federal Reserve will leave the benchmark federal funds rate at two percent through December, unchanged from today.

In an interview, Gross said that the Fed is walking a tightrope, inflation on one side and recession on the other.

For the economy, though, the Fed is probably doing the right thing for now, Gross said.

"The Fed, I think they are at neutral, and they should be," said Gross. "What really is the question is whether a central bank can drive down commodity prices by raising short-term interest rates."

"Prior orthodoxy has placed unemployment versus inflation. Whoever solves the economic problem makes history. They deserve a Nobel Prize."

Gross sees inflation coming down during the next year and thinks the Fed is managing the economy in that direction.

"They are looking forward," said Gross. "They do know that the Phillips curve and excess capacity will lower inflation.

"That is what we will have for the next 12 to 18 months. Inflation is basically going to come down over the next 12 months."

The Phillips curve — named for economist Alban William Phillips — is the historical inverse relation between the rate of unemployment and the rate of inflation in the economy. In short, the lower the unemployment in an economy, the higher the rate of increase in wages paid to labor in that economy.

The fed funds rate sits now at 2 percent and is unlikely to change for a while. "There is still a lot of stress in the financial market," said Gross. "Talking about additional shoes dropping is dangerous. But there are still substantial risks."

"The Fed is jawboning, and they are jawboning appropriately. By this time in December, the Fed funds rate will still be at two percent,” said Gross.

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Bond expert Bill Gross, founder of Pimco, says that the Federal Reserve will leave the benchmark federal funds rate at two percent through December, unchanged from today. In an interview, Gross said that the Fed is walking a tightrope, inflation on one side and recession on...
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2008-21-15
 

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