Bill Gross: Fed May Become 'Dovish' After Oil Price Drop

Bill Gross, who used to run the world’s largest bond fund before joining Janus Capital Group Inc. in September, said the Federal Reserve may become more “dovish” after oil prices plunged in recent weeks.

The Federal Reserve would have to take lower oil prices “into consideration,” Gross said in a Bloomberg Surveillance interview with Tom Keene. “I think that yes, it moves towards a dovish stance relative to what the market expected a few days ago.”

Benchmark U.S. oil prices have fallen below $60 a barrel, extending losses today as the International Energy Agency cut its global demand forecast for the fourth time in five months. Gross said with inflation showing no signs of approaching the Fed’s 2 percent target, policy makers won’t be in a hurry to raise interest rates.

“Why would they start to eliminate language that talked about an extensive period of time when the U.S. itself is, not deflating but disinflating, and certainly not moving in the direction of its 2 percent target,” Gross said.

The sharp decline in the price of oil has disoriented markets and changed the perception of the creditworthiness of companies and countries, said Gross, who co-founded Pacific Investment Management Co. in 1971 and left the firm Sept. 26 to run an unconstrained bond fund at Janus.

‘Small Door’

“When levered money moves and tries to seek a safe haven, basically you have violent price movements,” Gross said, adding there is “very little liquidity” in the corporate bond markets, especially in high-yield debt. “Everyone is trying to squeeze through a very small door.”

The relative small size of his fund at Janus, the Janus Global Unconstrained Bond Fund, which has grown to $1.2 billion from $13 million since he joined, allows more flexibility than the bigger funds at Pimco, he said. Gross previously ran the $162.8 billion Pimco Total Return Fund, which reached a peak of $293 billion in April 2013.

Gross’ Unconstrained fund has lost 0.6 percent in the past month,lagging behind 71 percent of similar funds, according to data compiled by Bloomberg.

With the U.S. economy still “highly levered” and dependent on cheap financing, the equilibrium interest rate may be close to where rates are now, Gross said.

‘New Natural’

“I call it the new natural, Pimco called it the new neutral,” Gross said, adding that Fed governors “talk about natural interest rates as opposed to neutral interest rates, so it’s a better one.”

“I think its closer to zero percent real and maybe even lower, which is close to where we are now,” he said.

His view echoes an outlook published in May by Newport Beach, California-based Pimco.

The firm said at the time that economic growth globally was converging toward lower, more stable speeds than in the past and that interest rates in that era would remain below their pre-crisis equilibrium, a scenario it called the “new neutral.”

Pimco filed to register the phrase “the new neutral” with the U.S. Patent and Trademark Office on May 16, according to the office’s website.