Tags: Gross | Fed | rates | stocks

Gross: Fed's Willingness to Keep Rates Low May Buoy Stocks, Bonds

By    |   Wednesday, 18 June 2014 10:10 PM

The Federal Reserve's apparent acceptance of lower-than-normal short-term interest rates for a long time may support financial markets, says Bill Gross, chief investment officer at Pimco.

The Fed announced Wednesday that the median forecast of its policymakers for the long-term federal funds rate has slipped to 3.75 percent from 4 percent.

That means the Fed is "beginning to believe" that the idea of a 4-percent normalized fed funds rate "should be reduced bit by bit," Gross told CNBC.

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"Does that change markets? Yeah, it does," he said.

"If we have a 2 percent nominal policy [fed funds] rate as opposed to 4 percent, it basically means that stocks with P-Es [price-earnings ratios] of 16 to 17 and credit spreads which are relatively narrow for high yield and corporate bonds can be supported with those low rates."

But if the Fed targets a higher rate, "I think markets can be viewed as bubbly," Gross said.

The Dow Jones Industrial Average had a trailing P-E ratio of 16.5 as of Friday, according to Birinyi Associates.

Some investors are happy that the Fed is in no rush to raise interest rates. "The Fed isn’t going to withdraw stimulus at the first sign of inflation running a little above their target," Brian Jacobsen, chief portfolio strategist at Wells Fargo Advantage Funds, told Bloomberg.

"Investors like that because the Fed’s going to stay accommodative."

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The Federal Reserve's apparent acceptance of lower-than-normal short-term interest rates for a long time may support financial markets, says Bill Gross, chief investment officer at Pimco.
Gross, Fed, rates, stocks
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2014-10-18
Wednesday, 18 June 2014 10:10 PM
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