Bill Gross wants the Fed to undo one of its most famous post-crisis actions
Janus Capital's Bill Gross wants the Fed to undo "Operation Twist."
Writing in his November investment outlook, Gross argues that the Fed has failed to create any meaningful improvement in the economy with its zero interest rate policy and quantitative easing programs.
And so as a fix, Gross wants the Fed to embark on what he calls "Operation Switch," undoing the famous "Operation Twist" the Fed undertook following the crisis in an effort to support the economy.
"Operation Twist" saw the Fed buy long-term Treasury bonds and sell an equal amount of short-term Treasury bonds in exchange. This didn't increase the total amount of securities the Fed held, but did serve to lower long-term rates which impact things like mortgage prices and long-term corporate debt. The effect the Fed desired through this program was to, "help to make broader financial conditions more accommodative."
Gross, of course, doesn't think this really worked.
The reason for this is two-fold.
One, Gross thinks that what the economy needs is a "steeper" yield curve - i.e., he thinks the difference between short-term and long-term Treasury yields needs to be larger - in order to stoke economic growth.
The other reason Gross would need the Fed undertaking an "Operation Switch" to steeped the yield curve is because he thinks the Fed should raise rates, meaning raise its benchmark overnight rate from its current range of 0%-0.25% to, well, something higher.
This is because not only does gross want the economy to do better, but he's worried about savers (which has become a catch-all for people that want to park their money in things like certificates of deposit and Treasury bonds and get something like a "guaranteed, risk-free return" on their money).
And so then Gross of course would need the Fed to step in and buy shorter-term Treasury debt because a two-year note yielding 0.76% today isn't going to be attractive to an investor that, in Gross' world, would be able to get 0.5% in an overnight transaction.
But these are details.
As has been the case with Gross' letters for some time now, the most basic premise remains the same: central banks haven't done what they promised for the economy and therefore a regime change is needed.
Or as Gross writes it: "My primary thesis ... remains that capitalism does not function well, and profit growth is stunted, if short term and long term yields near the zero bound are low and the yield curve inappropriately flat."