Markets Bet on Weak Economy and No Fed Rate Rise
The U.S. economy added a lower-than-expected 142,000 jobs in September, according to a government report that also slashed August employment growth and that showed little in wage gains for workers. Factories were hit particularly hard, reflecting a global economic slowdown and the strong dollar.
Investors reacted Friday by cutting the perceived chances of a Fed rate hike in December to only 30 percent, this despite repeated assurances in recent weeks from Chair Janet Yellen and other Fed policymakers that they expect to act this year.
The Fed has kept its key rate near zero since the depths of the financial crisis in late 2008.
The U.S. Federal Reserve would need to deliver more stimulus “if things were to weaken very much,” Chicago Fed President Charles Evans said on Monday, noting the economy could also surprisingly strengthen.
Responding to audience questions at Marquette University, Evans said additional bond purchases, known as quantitative easing, are an option if more monetary stimulus is needed. “We need to consider those Plan Bs,” he said, noting the global environment continues to be challenging.
Bond guru Bill Gross, who has long called for the Federal Reserve to raise interest rates, urged the U.S. central bank on Wednesday to “get off zero and get off quick” as zero-bound levels are harming the real economy and destroying insurance company balance sheets and pension funds.
In his October Investment Outlook report, Gross wrote that the Fed, which did not raise its benchmark interest rates at last week’s high-profile policy meeting, should acknowledge the destructive nature of zero percent interest rates over the intermediate and longer term.
“Zero destroys existing business models such as life insurance company balance sheets and pension funds, which in turn are expected to use the proceeds to pay benefits for an aging boomer society,” Gross said. “These assumed liabilities were based on the assumption that a balanced portfolio of stocks and bonds would return 7-8 percent over the long term.”
But with corporate bonds now at 2-3 percent, Gross said it was obvious that to pay for future health, retirement and insurance related benefits, stocks must appreciate by 10 percent a year to meet the targeted assumption. “That, of course, is a stretch of some accountant’s or actuary’s imagination,” he said.
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