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Central banks are lulling investors into “dream land”, warns Bill Gross

Investors live in a “dreamland” created by the decision of the global central banks to continue to stimulate the global economy, even if it has recovered strongly from the pandemic, said Bill Gross.

Historically low interest rates and gigantic bond purchase programs that are only now being cautiously scaled back have fueled widespread financial euphoria from stocks to digital assets such as “non-fungible tokens,” the founder of bond investment giant Pimco, the Financial Times told the Financial Times in an interview.

“That is dangerous,” warned Gross of an accommodating central bank policy. “It’s all a dreamland backed by interest rates that are not where they should be.”

The US inflation rate, already hotter than the Federal Reserve expected, accelerated to a three-decade high of 6.2 percent in October. In other world economies, too, including the UK, price growth is well above target. This has heightened concerns that central banks will have to act earlier and more aggressively than previously indicated.

Gross’ comments on the financial exuberance echoed an  -peal by Christian Sewing, CEO of Deutsche Bank, who said on Monday that central banks should tighten monetary policy to take “countermeasures” against rising inflation.

Gross, now retired, said he was skeptical that inflation would stay this high or accelerate further. However, he forecast it would likely stay well above the Fed’s 2 percent target for the foreseeable future.

Nonetheless, Gross raised the question of whether the Fed and other central banks would sensibly tighten – or even be able – to tighten their monetary policy in order to curb financial excesses and inflationary pressures, given the risk that the market could cause damage that would jeopardize the economic recovery.

“There’s not much you can do,” he said. “I think [Fed chair Jay Powell] is tr -ped in the financial markets, so he will gradually sneak out of buying bonds, and next year he may gradually raise interest rates. ”

Although inflation is picking up pace in most leading nations due to disrupted supply chains and a strong economic recovery from the Covid-19 shock, the global bond market has remained largely calm.

Short-term government bond yields have skyrocketed in recent weeks as investors price in the possibility or likelihood of rate hikes, but longer-term yields have largely remained rooted at record lows.

“The inflation data in the near future can be intimidating for ‘inflation fighters’. . . which could lead central bankers to at least discuss a faster response function versus this year’s slower response function, ”said Rick Rieder, chief investment officer for fixed income at BlackRock, last week. “Still, pandemic biases and extreme base effects are likely to subside over time,” he added.

The benchmark 10-year Treasury bond yield has risen in response to strong US inflation data released last week, but remains exceptionally low at around 1.6 percent, suggesting that many bond investors are keeping up with the current rate of inflation still hold for an increase will eventually pass.

But Gross – who now mostly manages the money of his own foundation – still worries about the long-term ramifications of the last decade’s money experiment with low or even negative interest rates and huge bond-buying programs that have totaled $ 23 trillion since 2008.

The persistent phase of low interest rates caused savers severe pain, said Gross. “One day, one of these years or one of these decades, the system will coll -se because c -italism depends on savers to save and invest.”

The reporter on this story can be reached at [email protected] and on Twitter at @robinwigg.

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