Home ListingJune 15, 2016

Gundlach, Gross Take Aim at Central Banks

Bill Gross, Jeff Gundlach, Rick Rieder, and Larry Summers sound off on central bank policy as the Federal Reserve announces its latest interest rate decision.

Reported by Featured Author

As criticism mounted on all sides against its monetary policy, the US Federal Reserve announced Wednesday it would not change its current interest rate target.

The federal funds rate target range will remain between 0.25% and 0.5%, the bank said, even as central bank peers including the Bank of Japan and European Central Bank adopt negative rates.

“The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” the Fed said in its official policy statement. “The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

DoubleLine CEO Jeff Gundlach and former Treasury Secretary Larry Summers had blasted the Fed’s failure to manage economic risks the day before the announcement—the former proclaiming that central banks are “losing control” as the latter suggested that the Fed’s strategy is “ill adapted to the realities of the moment.”

The pair join such outspoken critics as Janus Capital’s Bill Gross, who has warned of central bank failures in several recent investment outlooks.

“Central bank policies consisting of QE’s [quantitative easing] and negative/artificially low interest rates must successfully reflate global economies,” Gross wrote in April. “Or else markets and the capitalistic business models based upon them and priced for them will begin to go south.”

Gundlach echoed these concerns in an investor webcast Tuesday, pointing to the failure of negative interest rates to spark economic growth.

“We need central banks to get grounded in reality, not in theory,” he said. “You cannot succeed with negative interest rates, and it’s becoming painfully obvious.”

While Gundlach zeroed in on interest rates as the biggest problem, Summers argued in an opinion piece for the Washington Post that the Federal Reserve has already focused too much on returning to “normal” interest rates.

“Watching the Fed over the last year there is a Groundhog Day aspect,” the Harvard University President Emeritus wrote. “They keep holding out the prospect of future rate increases and then find themselves unable to deliver.”

Rather than prioritizing the interest rate, Summers said the Fed should instead focus on “assuring adequate growth in both real and nominal incomes going forward”—an outcome Gross also advocated in May, even suggesting that central banks print money to fund a universal basic income.

Yet despite all this criticism, the Federal Reserve has at least one supporter: BlackRock’s fixed-income CIO Rick Rieder, who said in an April blog post that the central bank is “doing exactly what it should be doing given today’s economic and market environment.”

“For now, I believe the Fed’s current wait-and-see stance is clear, appropriate, and appreciative of global economic, financial, and inflationary conditions,” he wrote. “The global risks today, particularly the growth risks out of China, coupled with the super aggressive easy monetary policy from the European Central Bank and Bank of Japan, require easier policy from the Fed.”