May 16, 2022

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Billionaire Bill Gross warns that a Fed rate hike will crush the US economy

Billionaire Bill Gross warns that a Fed rate hike will crush the US economy

This week, the US Federal Reserve raised interest rates by 0.25 percentage points from levels close to zero, while sharply raising the interest rate trajectory. The Fed is now envisioning six more interest rate increases in 2022.

Wednesday’s rate hike was the first in three years by the Federal Reserve, after it recently ended its supportive purchases of securities. Since the financial crisis, the Federal Reserve has supported the purchase of government bonds and mortgage bonds with the aim of supporting the economy through financial markets.

The shift in monetary policy comes after the highest inflation rate in more than 40 years. In the US, inflation in February was 7.9 percent year on year. The Fed now envisions an inflation rate of 4.3 percent in 2022, up from 2.6 percent in December.

World-renowned and billionaire bond fund manager Bill Gross (77) told the Financial Times that inflation is at alarming levels. He does not believe that the central bank can fix this by increasing interest rates.

– I think you can’t get more than 2.5 to 3.0 percent without breaking the bank. We’re used to lower and lower interest rates, and anything much higher will crush the housing market, Gross says in an interview with the Financial Times.

Companies with only dreams

Gross founded the management company Pimco in 1971, and it is often called in Norwegian the “king of bonds” or “the king of bonds”. He has long criticized the zero interest rate policy of the Federal Reserve and other central banks.

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– Destroys the saving function. Meme stock and NFTs, all this nonsense in my opinion has developed from a lack of opportunity to get a good return in retirement savings, Gross tells FT.

Lower interest rates mean a lower return on the money in the bank. In periods of zero interest rates, capital usually flows elsewhere in search of higher returns – often to riskier assets.

The increased risk has also made sense in recent years, says investor and former hedge fund manager Peter Warren, as money pressure from central banks has contributed to higher asset prices and less volatility in markets.

Because of central banks, it made sense for investors to go up in the risk scale. They’ve gone from companies with solid earnings, to companies with lower profits, to companies with no dividends, and then to companies with only dreams, Warren tells DN.

More will raise more

When the Fed raised its key rate by a quarter of a percentage point earlier this week, only one member of the committee agreed with it.

Federal Reserve Governor James Bullard in St. Louis wanted a rate increase of half a percentage point, and said Friday that he believes the key rate should be more than three percent by the end of 2022, while the majority in the Fed’s interest rate committee The Fed envisions an interest rate of between one and a half and two per cent.

Pollard’s desire for a three percent key rate entails a 12-point hike this year, in the form of six “double hikes” of 0.5 percentage point. Christopher Waller also wrote that he believes that a half-percentage point rate increase may be necessary CNBC Friday.

The interest rate differential between US government bonds with maturities of two years and ten years, respectively, has narrowed recently. This is called flattening of the yield curve. If the spread becomes negative, the yield curve is said to have inverted, and this has historically proven to be a sign of an upcoming recession.

If the ten-year interest rate is lower than the two-year interest rate, this may indicate that the market is concerned about long-term growth prospects. This could be due to market fears that the central bank will tighten too hard too quickly, or that the market has seen something else could go wrong, and so future short-term interest rates will drop again, something they usually do says the chief economist at Handelsbanken, Marius Gunsholt Hof, to DN. (Terms)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using a link that leads directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.