Why Do Central Bankers Continue to Surprise Bill Gross?

On March 29, 2016, Fed chair Janet Yellen cautioned her audience that with low interest rates, the FOMC’s (Federal Open Market Committee) “ability to use conventional monetary policy to respond to economic disturbances is asymmetric.” The speech suggested that for the FOMC to readily raise its target range in order for the federal funds rate to stabilize the US economy (SPY) (IWM) (QQQ), economic conditions would need to strengthen considerably.

Interest rates in most developed nations have been zero-bound and even negative for a while now.

In his recent webcast by Janus Capital, Bill Gross expressed his surprise at the extent to which central bankers of the developed world (EFA) (VEA), including Janet Yellen, Mario Draghi, and Haruhiko Kuroda, have distorted the financial system. Gross said, “Central bankers need to understand that we are in a different world today. The Taylor Rule and the Phillips curve say nothing about high levels of debt/leverage. That is why we saw what we saw in 2007.”

Leverage has a great impact on economic growth going forward. Central bankers have failed to adapt to a world of high debt and high leverage. We’re seeing high levels of debt in global pockets such as China and other emerging markets (EEM) (VWO). Yet the monetary policy tools being used to spur growth and productivity remain the same.

Gross remains highly critical of decisions and statements made by the ECB (European Central Bank) and the BoJ (Bank of Japan (EWJ)). According to Gross, these central bankers just don’t see what has worked and what hasn’t. Statements such as we’ll do “whatever it takes” emphasize this fact. The respective central banks may go on buying sovereign securities, but it’s really not making a difference.

Over a longer term, Gross continues to stand by his criticism of zero-bound and negative interest rates.

In the next part of this series, we’ll see the result of investing in negative interest rates.