Tags: Pimco | Gross | Unemployment | Worsen

Pimco's Gross: Unemployment Will Worsen Next Year

Wednesday, 11 Jul 2012 03:31 PM

The unemployment rate has remained stubbornly high in the U.S. despite a slew of policy responses from the Federal Reserve to put more people back to work.

But Fed action can only do so much, and joblessness is set to worsen, says Bill Gross, founder of Pimco, manager of the world's largest bond fund.

The U.S. unemployment rate has hovered over 8 percent for more than three years, yet for seven decades after the Great Depression, the rate averaged 5.4 percent, according to The Wall Street Journal.

Since the downturn, the Fed has cut its benchmark interest rate, the fed funds target, to near zero and has also injected trillions of dollars into the economy via bond buybacks from banks, an accommodative policy tool known as quantitative easing (QE).

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

Still, until banks begin to lend again and businesses feel like growing and borrowing, all the monetary policy tools in the world are likely to have muted effects.

"I think by this time next year we'll see unemployment higher than it is. We'll see production relatively flat," Gross tells CNBC.

Headwinds from abroad can slow recovery in the U.S. as well by continuing to crimp demand.

"This economy and the global economy itself needs credit. And it depends on credit and credit expansion," Gross adds.

The Fed adheres to two mandates: keep consumer prices stable, which all central banks follow, and secondly, keep unemployment rates at optimal levels, which is one reason why the Fed has acted so aggressively to stimulate the economy.

More action could follow, including a new round of quantitative easing or even cutting the rate that banks receive when parking money in Federal Reserve overnight deposits.

Still, by their nature, monetary policy measures suffer from diminishing returns, which is why further actions aren't likely to make much of a dent in today's high employment rates.

Low interest rates and loose policies can also cut into savings, which hurt businesses as well.

"These provisions have increasingly grown weaker and weaker and weaker. Basically the reason for that is simply that as interest rates move down to the zero line and this is sort of a twist in terms of logic, but as interest rates move down towards the zero line, it's not necessarily positive but it has negative implications, as well," Gross says.

"Business models, money market funds, banks, insurance companies and pension funds all imploded based upon the low rates opposed to high rates they're used to so there's a negative twist to the twist."

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

The Fed remains ready to inject more liquidity into the economy though has stopped short of hinting at any specifics of such lately.

The U.S. central bank on Wednesday released the minutes of its latest monetary policy meeting in June, and reveals some voting members have grown increasingly concerned the economy may cool to the point that response will be needed.

"A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee's goal," the minutes from the Fed's June 19-20 meeting read.

"Several others noted that additional policy action could be warranted if the economic recovery were to lose momentum, if the downside risks to the forecast became sufficiently pronounced, or if inflation seemed likely to run persistently below the Committee's longer-run objective."

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