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Gross: Fed to Keep Rates Near Zero for Year

By Gene J. Koprowski   |   Wednesday, 09 Dec 2009 08:02 AM

The Federal Reserve will likely keep U.S. interest rates near zero throughout the coming year, but longer-term rates will gradually edge up, said Bill Gross, founder of Pimco, the world’s largest mutual fund.

"We have a lot of supply, and perhaps not as much demand to satisfy that supply,” Gross tells CNBC. “And that may actually reinforce the move towards higher rates on the longer end of the yield curve."

Gross reckons that stocks will perform "all right" in the long-term, but equity investors shouldn't expect the same double-digit returns as the Fed drains excess liquidity out of the markets.

Stocks, in what Gross terms the “new normal environment,” will not return double digit growth, perhaps peaking at 5 to 6 percent over an extended period.

“Stocks and other risk assets have already benefited from the liquidity injection from policy makers,” says Gross.

Right now, however, stocks are not overvalued. But “bonds are overvalued now. Treasuries and other sovereign assets are overvalued relative to the rate of inflation,” says Gross.

“There aren’t too many guideposts to stir anyone, including the Fed. The IMF came out with a study for high-debt countries showing how the debt will impact longer-term rates. Rates are heading higher.”

Gross, who recently met with former Fed Chairman Alan Greenspan, says he expects inflation to remain low and interest rates will too. “2010 will be a year in which the Fed stays at near zero,” says Gross.

Despite the concerns about the long-term impact of the debt on inflation and interest rates, the lower rates are starting to have an impact on the U.S. economy.

The Philadelphia Inquirer reported that prospective homeowners are now coming forth, attracted by the low rates, which have been kept low by the Fed for an extended period to help the economy.

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The Federal Reserve will likely keep U.S. interest rates near zero throughout the coming year, but longer-term rates will gradually edge up, said Bill Gross, founder of Pimco, the world’s largest mutual fund."We have a lot of supply, and perhaps not as much demand to...
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