Jim Young/Reuters
- The world's reserve currency could sink under the Fed's current policies, Bill Gross said in the FT.
- He disputed Jerome Powell's decision to keep interest rates low until the pandemic is under control.
- Inflation will force the Fed to move away from its ultra-easy policies sooner than expected, he said.
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Billionaire investor Bill Gross wrote in a Financial Times op-ed on Tuesday that the Federal Reserve could risk sinking the dollar if it continues to support accommodative monetary policies for too long.
"I suspect that $5 trillion spending programmes and the Fed's current package of near zero per cent short-term rates and $120 billio n of monthly bond buying will move growth, inflation and financial markets far beyond reasonable targets that ultimately will jeopardize post-Covid-19 normals," he wrote.
Gross, who has since retired since co-founding investment firm Pimco and moving Janus Henderson Investors, argued the threat of inflation will force the US central bank to change tack and move away from its policies sooner than it expects.
"The Fed cannot for long continue to maintain current policy rates and expand its own balance sheet and therefore private bank reserves at a $120 billion monthly pace," he said.
Enormous amounts of money, as a result of quantitative easing, pumped into the economy over the past year to help sustain the fallout from COVID-19 led to an increase in the amount of cash in circulation. This circumstance inevitably leads to inflation and decreases the value of the currency, thereby devaluing investor savings.
Gross called out Fed Chairman Jerome Powell for transitioning from a more conservative stance to one that has "unleashed the potential for chaotic future economic and market outcomes."
The one-time "bond king" disputed Powell's decision to keep interest rates low until the pandemic is more controlled and employment returns to normal. Unemployment may never return to 4% given the revolutionary changes in the work-from-home environment, in Gross' view.
"And how long can the Treasury continue to require near-costless Fed financing for $2 trillion, $3 trillion and $4 trillion deficits without sinking the dollar? In a historical gold-standard world, Fort Knox would have been emptied long ago, implying the bankruptcy of the world's reserve currency," he said.
Gross also suggested that several cryptocurrencies and the boom in special-purpose acquisition companies have been a result of having an accommodative Fed.
"Cash has been trash for years, but soon it may be the only haven for investors sated beyond reasonable expectations of perpetually low yields and supportive bond kings and queens," he said.