Legendary investor Bill Gross warns the Fed will ‘crack the economy’ by hiking interest rates aggressively

• Bill Gross told the FT the Federal Reserve could “crack the economy” by raising interest rates too aggressively.
• The Fed made its first rate hike since 2018 last week, with six more increases likely this year.
• But Gross thinks it will struggle to hike above 2.5%, as the US economy is used to low rates.

Veteran investor Bill Gross has warned the Federal Reserve risks severely damaging the US economy by raising interest rates too aggressively.

“I suspect you can’t get above 2.5 to 3% before you crack the economy again,” Gross told the Financial Times in an interview published Saturday.

“We’ve just gotten used to lower and lower rates, and anything much higher will break the housing market.”

The Fed hiked interest rates for the first time since 2018 last week, and officials signaled that six more increases are likely this year. Policymaker James Bullard, president of the St Louis Fed, has called for rates to rise above 3% this year.

However, many investors are concerned the Fed will harm US growth in its effort to tame the strongest inflation in four decades.

Some see worrying signs in the bond market. The yield on the 10-year Treasury note has risen more slowly than that on the 2-year note.

That’s got investors worried about a potential inversion of the so-called yield curve — when long-term debt becomes cheaper than short-term debt — which has traditionally preceded recessions. 

Gross told the FT that low interest rates have had negative effects on the economy and markets.

“It destroys the savings function,” he said. “Meme stocks and NFTs, all of this nonsense in my mind has developed from the inability to earn a decent return in your 401k.”

Gross co-founded investment company Pimco and built it into the preeminent force in the fixed-income world. The 77-year-old “Bond King” now invests his own money, after retiring in 2019.

The veteran investor has used options to bet against meme stocks GameStop and AMC. He told the FT that he’s up around $15 million to $20 million on the positions.

Despite the worries of investors such as Gross, plenty of analysts and policymakers think the Fed can raise rates relatively sharply without doing too much damage to the economy. The S&P 500 rose more than 6% last week, for its best weekly performance since November 2020, as the Fed began its rate-hiking cycle.

The central bank’s policymakers indicated last week they expect to raise interest rates to a peak, or terminal rate, of around 2.8% by 2023.

“We see the risk of recession over the next 12 months as relatively contained,” Morgan Stanley economists said in a note to clients last week.

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