Gross: Bernanke to end rate-hike run

[gldstwmn]

http://money.cnn.com/2005/10/27/mark...imco/index.htm

Pimco chief says Fed chief nominee's philosophy should keep yields low; sees end of rate hikes near.
October 27, 2005: 7:02 AM EDT


NEW YORK (CNN/Money) - Bill Gross, the managing director of the nation's largest bond fund, says the appointment of Ben Bernanke to be the next chairman of the Federal Reserve should help to keep intermediate and long-term Treasury yields in check, and that he expects Bernanke to stop hiking interest rates early next year.

"I view him favorably, especially his views on inflation targeting," Gross wrote in his most recent commentary on the Web site for Pimco, his bond fund.

Bernanke is an advocate of tying the Fed action setting short-term interest rates to explicit inflation targets as a way of promoting both price stability and transparency for Fed policy. Several overseas central banks have such inflation targets as part of their stated policy.

"Inflation-targeting central banks in other parts of the world, such as the United Kingdom and implicitly the European Central Bank, have economies with lower inflation and lower long-term yields than here in the United States," Gross wrote. "Admittedly their economies (Euroland) and accounting standards (U.K.) promote lower yields, but inflation targeting is part of the explanation as well since it induces a greater degree of confidence in the admittedly fragile value of paper money."

Gross also believes that the Fed will stop hiking rates soon after the expected start of Bernanke's term in February.

Gross wrote that the gap between interest rates and the rate of inflation is the key measure of whether the central bank's closely watched short-term rate, the Fed funds rate, is approaching the neutral level the Fed has been seeking. He says that suggests the Fed is getting close to an end of rate hikes after 11 straight quarter percentage point boosts.

"By the time 10-year and 2-year Treasuries reach parity, as is almost the case now, the economy is typically slowing and the Fed is at or near the end of its tightening cycle," Gross wrote. "We are due for what appears to be a 2 percent or less Gross Domestic Product growth rate in 2006, a rate sure to stop the Fed and to induce eventual ease at some point later in the year."

"It will likely be Bernanke's first policy shift and an indicator of his willingness to address the Fed's dual mandate of inflation targeting and economic growth," Gross added.

[DavidMn]

One of THE hardest things to do in this world is listen to Alan Greenspan talk. I know he's brilliant and all that, but MY GOD . Maybe this guy will be a little more interesting?

[gldstwmn]

Originally Posted by DavidMn

One of THE hardest things to do in this world is listen to Alan Greenspan talk. I know he's brilliant and all that, but MY GOD . Maybe this guy will be a little more interesting?

I doubt it. The most entertaining economist around, hands down is Lou Dobbs.

[irishgrl]

ok....so what does all this mean to Joe Investor? or Joe Homebuyer or Joe Homeowner? will housing prices now drop? ARGH! I need a translator!

[strandinthewind]

Originally Posted by irishgrl

ok....so what does all this mean to Joe Investor? or Joe Homebuyer or Joe Homeowner? will housing prices now drop? ARGH! I need a translator!

It means, and Chris knows WAY more about this than I do, that he thinks inflation is in check, which is not exactly incorrect.

Not much is known about this guy though.

[irishgrl]

Originally Posted by strandinthewind

It means, and Chris knows WAY more about this than I do, that he thinks inflation is in check, which is not exactly incorrect.

Not much is known about this guy though.

therefore, are interest rates falling as well? what will this mean for the housing market?

[strandinthewind]

Originally Posted by irishgrl

therefore, are interest rates falling as well? what will this mean for the housing market?

lower rates are great for the housing market, esp. with the 100% creative financing deals out there. The housing and thus lending boom were a very real catalyst for sustaining the economy for the last five years. Without them, it would have been worse Having said that, I do not think rates will fall again. Chris, what do you think?

[gldstwmn]

Originally Posted by strandinthewind

Having said that, I do not think rates will fall again. Chris, what do you think?

I do not think we will see a drop in interest rates in the near future. However, Mr. Gross thinks that Mr. Bernanke will slow down or altogether stop rate increases (meaning the fed overnight funds rate) that has been raised 11 times in the last year. The fed overnight funds rate directly impacts the prime rate-the rate that banks base what they are going to charge you the consumer. That directly impacts some second mortgages (known as HELOCS), car loans, credit cards, etc. This, along with other factors such as the stock market and the bond market can influence mortgage rates. The 10 year treasury note directly effects fixed rate mortgages. As a very general rule, when the yield on the 10 year note goes down then rates ususally follow. Then you have the indices such as LIBOR, MTA, COSI and COFI that effect adjustable rate mortgages.
With repsect to housing prices, I'm not all that familiar with your particular market Mary but I do know California real estate has experienced an incredible amount of appreciation in the last decade. The market will suffer if there is an abundance of homes on the market with no buyers. The market is generally considered to be favorable to buyers right now (unless you live in New Orleans and vicinity).
Anyway, I think I'm just rambling now.

[strandinthewind]

Originally Posted by gldstwmn

I do not think we will see a drop in interest rates in the near future. However, Mr. Gross thinks that Mr. Bernanke will slow down or altogether stop rate increases (meaning the fed overnight funds rate) that has been raised 11 times in the last year. The fed overnight funds rate directly impacts the prime rate-the rate that banks base what they are going to charge you the consumer. That directly impacts some second mortgages (known as HELOCS), car loans, credit cards, etc. This, along with other factors such as the stock market and the bond market can influence mortgage rates. The 10 year treasury note directly effects fixed rate mortgages. As a very general rule, when the yield on the 10 year note goes down then rates ususally follow. Then you have the indices such as LIBOR, MTA, COSI and COFI that effect adjustable rate mortgages.
With repsect to housing prices, I'm not all that familiar with your particular market Mary but I do know California real estate has experienced an incredible amount of appreciation in the last decade. The market will suffer if there is an abundance of homes on the market with no buyers. The market is generally considered to be favorable to buyers right now (unless you live in New Orleans and vicinity).
Anyway, I think I'm just rambling now.

I got it -

[macfan 57]

Originally Posted by gldstwmn

http://money.cnn.com/2005/10/27/mark...imco/index.htm

Pimco chief says Fed chief nominee's philosophy should keep yields low; sees end of rate hikes near.
October 27, 2005: 7:02 AM EDT


NEW YORK (CNN/Money) - Bill Gross, the managing director of the nation's largest bond fund, says the appointment of Ben Bernanke to be the next chairman of the Federal Reserve should help to keep intermediate and long-term Treasury yields in check, and that he expects Bernanke to stop hiking interest rates early next year.

"I view him favorably, especially his views on inflation targeting," Gross wrote in his most recent commentary on the Web site for Pimco, his bond fund.

Bernanke is an advocate of tying the Fed action setting short-term interest rates to explicit inflation targets as a way of promoting both price stability and transparency for Fed policy. Several overseas central banks have such inflation targets as part of their stated policy.

"Inflation-targeting central banks in other parts of the world, such as the United Kingdom and implicitly the European Central Bank, have economies with lower inflation and lower long-term yields than here in the United States," Gross wrote. "Admittedly their economies (Euroland) and accounting standards (U.K.) promote lower yields, but inflation targeting is part of the explanation as well since it induces a greater degree of confidence in the admittedly fragile value of paper money."

Gross also believes that the Fed will stop hiking rates soon after the expected start of Bernanke's term in February.

Gross wrote that the gap between interest rates and the rate of inflation is the key measure of whether the central bank's closely watched short-term rate, the Fed funds rate, is approaching the neutral level the Fed has been seeking. He says that suggests the Fed is getting close to an end of rate hikes after 11 straight quarter percentage point boosts.

"By the time 10-year and 2-year Treasuries reach parity, as is almost the case now, the economy is typically slowing and the Fed is at or near the end of its tightening cycle," Gross wrote. "We are due for what appears to be a 2 percent or less Gross Domestic Product growth rate in 2006, a rate sure to stop the Fed and to induce eventual ease at some point later in the year."

"It will likely be Bernanke's first policy shift and an indicator of his willingness to address the Fed's dual mandate of inflation targeting and economic growth," Gross added.

Hmm...very interesting. Bill Gross is a very smart guy. When he says something, people tend to listen. Of course, the Federal Reserve can only control short term interest rates. The market determines long term rates. I see them continuing to rise, at least into next year.