US stimulus programme likely to continue to 2016

Bill Gross, manager of the world’s biggest bond fund, said the Federal Reserve is unlikely to slow stimulus and lift its target rate for overnight loans between banks until 2016 with employment growth insufficient.

“Based on these types of numbers” for payroll growth, the Fed’s “policy rate stays where it is until 2016,” Mr Gross, founder of Pacific Investment Management, said on Bloomberg Surveillance with Tom Keene and Mike McKee.

At this pace “there is not much room for more than 2% growth. The 10-year Treasury yield probably belongs at around 2.5%.”

Payrolls rose a less-than-projected 148,000 positions in September, indicating the US economy had little momentum leading up to the partial federal government shutdown earlier this month.

The median forecast of 93 economists surveyed by Bloomberg called for a 180,000 advance.

Unemployment fell from 7.3% to 7.2%, the lowest level since Nov 2008, Labor Department figures showed. The report was delayed by the 16-day shutdown that ended last week.

The labour force participation rate held at 63.2%, matching the lowest since Aug 1978.

The five-year Treasury yield, given the jobs data, “belongs somewhere in 1.2% to 1.3% range,” Mr Gross said. “We settle out based on expectations for the policy rate. I know the taper is in focus and there probably won’t be tapering anytime soon.”

Investors should focus on buying debt instruments, including Eurodollar futures and Treasury securities that have maturities up to seven years and avoid longer-term debt, such as 30-year bonds, which could be hurt if the Fed’s accommodative monetary policy eventually triggers inflation, Mr Gross said.

Fed policy makers, scheduled to gather Oct 29-30, are trying to gauge the strength of the US expansion.

Fed policymakers cut rates to a record low as the financial crisis mounted in 2008.

It has kept its benchmark overnight bank lending rate in a range of zero to 0.25% since Dec 2008, has said it will maintain that rate while unemployment held above 6.5% and inflation stayed below 2.5%.