One of the top bond investors in the world says the Federal Reserve has waited too long to raise interest rates, and that recent volatility in the financial markets might signal deeper problems in the global economy.
In a note published Wednesday, bond investor Bill Gross wrote that the “timing and the eventual ‘size’ of the Fed’s ‘tightening’ cycle that I have long advocated … now seems to be destined to be labeled ‘too little, too late.'”
Gross, who manages a $1.5 billion bond fund for Janus Capital, suggested that the Fed missed its window to raise interest rates earlier this year, and that it should have raised its target all the way to 2 percent.
Gross, who previously ran the world’s largest bond fund at PIMCO, published the note as Chairwoman Janet Yellen and other Fed officials prepare for a highly anticipated monetary policy committee meeting in mid-September. Previously, investors had thought that the meeting would see a historic rate increase, the first in nearly a decade. Recent market volatility, however, has thrown that prospect into doubt.
Wild swings in the markets over the past month “are but one sign that something may be amiss in the global economy itself,” Gross wrote.
By holding short-term interest rates at zero for six years, Gross suggested, the Fed has engaged in a policy that “destroys historical business models essential to capitalism such as pension funds, insurance companies and the willingness to save money itself.”
Now there are major economic imbalances across the global economy, he argued. The developed world must “begin abandoning its destructive emphasis on fiscal austerity” and spending on infrastructure, he wrote. In any case, he guessed, the Fed may not be able to raise rates again for six months after the first rate hike.
For its part, the Fed has said in recent monetary policy statements that it closely watches the effects that its monetary policy has on potential financial bubbles and inflation.
Recent Fed statements indicate that officials still believe the economy is operating below potential and that they are looking for employment to rise further and signs that inflation is moving up to the central bank’s 2 percent target before beginning to tighten monetary policy.
