Billionaire bond manager Bill Gross, who has long warned that low interest rates punish savers and banks, says the Federal Reserve is likely to be cautious with increases because the current environment leaves little room for error.
“Should a crisis arise because of policy mistakes, geopolitical crises, or other currently unforeseen risks, the ability to protect principal will be impaired relative to history,” Gross wrote in an investment outlook released Thursday. “That in turn argues for a more cautious and easier Fed than otherwise assumed.”
The central bank is expected to raise rates for the third time this year when it meets Dec. 13. By the end of 2018, the federal funds target rate will nearly double to 2.125 percent, according to the median projection of its open markets committee members. Market futures project a 1.8 percent rate by next December.
A Fed funds rate above 2% could imperil the economy, Gross said in an email Wednesday. The current short-term interest-rate target is at 1% to 1.25%.
This is Gross’s first published investment outlook since July, when he also urged the Fed to raise rates with caution. In his new note, titled “Investment Potpourri,” Gross reiterated familiar themes, such as economist Hyman Minsky’s theory that rising leverage induces economic instability, and the need for investors to be rewarded above the cost of carrying their positions.
Gross, 73, manages the $2.2 billion Janus Henderson Global Unconstrained Bond Fund, which has averaged 2.2% returns over the last three years, outperforming 45% of its peers, according to data compiled by Bloomberg.