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Bill Gross: Central Banks Mastered Art Of Market Manipulation

(Kitco News) - Bond kings and former PIMCO colleagues Bill Gross and Mohamed El-Erian, are talking the Fed, and one of them isn’t too happy with central bankers.

In a letter to investors, Gross accused the Federal Reserve of “market manipulation” and said officials have “deferred long-term pain for the benefit of short-term gain.” He added that investors should know that they’re treading on thin ice.  

He is referring to the zero interest-rate policies around the world introduced by central bankers as well as the Fed’s efforts in keeping yields low in the U.S.

“Capitalism, almost commonsensically, cannot function well at the zero bound or with a minus sign as a yield. $11 trillion of negative yielding bonds are not assets — they are liabilities. Factor that, Ms. Yellen, into your asset price objective," he wrote.

Central bankers, including Fed Chair Janet Yellen, have “all have mastered the art of market manipulation and no — that's not an unkind accusation — it's one in fact that Ms. Yellen and other central bankers would plead guilty to over a cocktail at Jackson Hole or any other get together of PhD economists who have lost their way," he added.

Gross’ comments come as markets try to decipher when the U.S. central bank will raise interest rates. According to CME FedWatch Tool, markets are now pricing in a higher chance of a rate hike this year – 27% chance in September, 33% chance in November and a 55.4% chance in December.

"This watch is ticking because of high global debt and out-of-date monetary/fiscal policies that hurt rather than heal real economies. Sooner rather than later, Yellen's smooth shot from the fairway will find the deep rough," he said.

Fellow bond guru and chief economic adviser at Allianz, El-Erian, argued that the Fed might raise rates next month – if Friday’s nonfarm payrolls report comes out strong.

“What makes that probability go a lot higher is a Friday report that has three things: job creation in excess of 180,000, wage growth going up and no significant move in the participation rate that pushes the unemployment rate up,” he told CNBC on Tuesday.

If these three factors are met, the case for “not hiking would weaken tremendously,” he explained.

Consensus forecasts are calling for Friday’s jobs report to show that 186,000 jobs were created last month and the unemployment rate to come in at 4.8%.

By Sarah Benali of Kitco News; sbenali@kitco.com

 

 

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