With the US inflation rate starting to trend downward, the debate has certainly turned to when the Federal Reserve should stop raising interest rates and a legendary bond investor has just warned that the Central banks are in danger of exceeding their targets.
While US inflation has shown some positive sign recent normalization, Federal Reserve, architect of six rate hikes this year that many people were afraid to risk throwing the economy fall into recessiondoesn’t seem to intend to stop anytime soon.
Critics of the Federal Reserve’s aggressive strategy have said that the central bank risks exceeding its interest rate targets by keeping them too high for too long. Part of that criticism lies in speed, velocity rate hikes this year, leaving little time left to assess the impact of each hike on inflation and the state of the economy.
And one of the things the Fed may be missing is the “dangerous” hidden leverage — off-balance sheet and largely unchecked debt — that is now circulating in the economy, said Bill Gross, billionaire bond investor and investor. Pimco co-founder, warning. one of the largest hedge funds in the world.
There is a very real risk of “too much latent leverage” in today’s economy, Gross wrote in a Post comments give Financial Times Second, and he advises the Fed to consider whether it has reached the “optimal” interest rate.
“The risk of soaring and the need for a forward-looking monetary policy argues strongly about this,” he wrote. “For now, the Fed should stop raising rates and wait and see if the punching bowl is exhausted.”
“Dark Debt”
In 2002, Asset called Bill Gross “bond king,” a nickname also used this year in the title of a story Authored by Mary Childs of NPR. Total retirement in 2019 after a mostly uneventful stint at Janus Henderson, but his revolutionary work in the bond market earned him the nickname and at one point he controlled the bond fund. largest vote in the world.
Gross’s preference for bonds – a form of debt sold by companies or governments – makes him an authority when it comes to warnings about the underlying debt that is rocking the economy. How is the economy today?
In my op-ed for FTGross writes that it’s “important to recognize the dangerous levels of debt” circulating in today’s economy, citing a recent report. review by the Bank for International Settlements finds that investors have been taking on a large amount of “off-balance-sheet dollar debt” which is posing a major risk to the US economy.
The total value of this “hidden ‘shadow bank’ debt” is $65 trillion, Gross wrote. He advised the Fed to pay more attention to shadow banks, the network of non-banking institutions that includes creditors and brokers that are not part of the traditionally regulated banking system, and sounded the alarm. warns of “too much leverage hidden, too much debt behind closed doors.”
Gross isn’t the only market watcher to warn of the extreme risks of high debt in an increasingly uncertain economic environment. Nouriel Roubini, an NYU economist and president of the economic consulting firm Roubini Macro Associates, warned of an impending “big inflationary debt crisis” in November. interview with Assetas huge mountains of public and private debt threaten to push the economy into prolonged trouble.
Gross wrote that the Fed should keep interest rates steady, currently at 4.25% to 4.5% range after this month’s most recent rally and get a feel for the economy before making other moves. He refers to the so-called stellar ratio R (also known as real neutral interest rate), represents an ideal rate for a full-employment economy, and argues that both the R-star and the current federal funds rate are already at optimal levels, and increasing them further considering the underlying debt forces at play could mean more “trouble” ahead.”
Low speed pause capability
Gross added that the current rate target is only ideal if inflation “seems to be approaching an acceptable level,” so bond kings could be encouraged by the most recent trends.
In November, US consumer prices increased 7.1% year-over-year, down from 7.7% in October and the fifth consecutive drop in inflation since a June peak of 9.1%. Prices have dropped for key elements including gasoline and may have even begun to drop for Housepush some to declare the worst is over.
The latest price data has encouraged many economists, from Nobel laureates Paul Krugman to the University of Michigan Justin Wolfers, to declare that inflation has peaked and the economy is on track to normalize. Even former Treasury Secretary Larry Summers, who once predicted a deep recession and high unemployment due to delayed action from the Fed, recently admitted prices have fallen faster than he expected.
“However, for now, the economy looks stronger, and inflation and inflation expectations are a bit lower than I would have guessed a few months ago,” Summers said. Written on Twitter last week after the release of the latest CPI report.
But despite the encouraging signs, the Fed has signaled that there is a long way to go before inflation returns to levels acceptable to the central bank.
At the central bank’s final 2022 meeting earlier this month, Fed Chairman Jerome Powell alert “we still have some way to go,” and while he left the door open for less rate hikes next year, there was little or no possibility of a pause in rate hikes.
“We judged today that we do not have a sufficiently restrictive policy stance,” he said. “We will continue the course until the work is done.”
This story was originally featured on Fortune.com
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