Bill Gross calls Fed's projected rate hikes `likely exaggerated'

Don’t believe the Fed.

That’s what Bill Gross, the billionaire bond manager with Janus Henderson Group Plc, says in an investment outlook released Thursday.

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Bill Gross, co-chief investment officer of Pacific Investment Management Co. (PIMCO), right, talks to host Erik Schatzker during an alumni event hosted by UCLA Anderson School of Management in Beverly Hills, California, U.S., on Thursday, Nov. 17, 2011. Gross said the European debt crisis is the top risk to the U.S. economy currently. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Bill Gross; Erik Schatzker

“The Fed’s purported three to four hikes this year beginning in March are likely exaggerated,” wrote Gross, who runs the $2.2 billion Janus Henderson Global Unconstrained Bond Fund. “The U.S. and global economies are too highly leveraged to stand more than a 2% Fed Funds level in a 2% inflationary world.”

The Federal Reserve raised rates by 0.25% Wednesday in response to a strong U.S. economy, the first hike since Jerome Powell became chairman last month. The median forecast of members of the Federal Open Market Committee is for more than three hikes for all of this year and three more next year, putting the Fed Funds target rate at 2.125% rate by the end of 2018 and 2.875% at the end of 2019.

A rate above 2% risks destabilizing the U.S. economy, slowing emerging market growth and prompting premature rate hikes by the European Central Bank and other developed economies, Gross said.

“The Fed, under Jerome Powell, hopefully has learned that lesson, and should proceed cautiously, as must his counterparts around the globe,” Gross wrote.

The U.S. 10-year rate will fluctuate around 3% for most of 2018, Gross said. After the Fed decision it spiked above 2.9% Wednesday, the highest this month, before dropping later in the day. In January, when rates on the 10-year passed 2.5%, Gross pronounced the end of a 35-year bond bull market.

“Still, in my mind, this is a hibernating global bear bond market, not a beast,” Gross wrote in Thursday’s note. “That may come later.”

Gross’s unconstrained fund, which is structured to avoid losses in a rising rate environment, has returned 0.16% this year through March 20. It returned an annual average 2.4% over the last three years, outperforming 55% of its Bloomberg peers.

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