Business World

Monday 5 December 2016

Fed 'to hold rate rise for two years'

Alex Kowalski

Published 07/08/2010 | 05:00

THE US Federal Reserve is unlikely to raise interest rates for two to three years as it seeks to keep the economy from slipping back into recession, the boss of the world's biggest holding of government debt has said.

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And Nobel laureate economist Joseph Stiglitz called for more government stimulus from the Obama administration to avoid a new depression.

As the yield on US two-year government bonds fell below 0.5pc for the first time, Bill Gross, bond manager for Pacific Investment Management Co, said the market was saying that US interest rates were on hold "for a long, long time".

He also forecast that the US faced long-term structural unemployment near 7pc.

"The jobs that were will not be coming back and the unemployment rate of 4.5pc was really a fiction of the levered era," Mr Gross said.

Prof Stiglitz said the world's biggest economy faced an "anaemic recovery" and the US government would need to enact another round of stimulus measures, which should be better designed.

The Obama administration "took a big gamble and it doesn't look like it's paying off", Prof Stiglitz told Bloomberg TV.

"The recovery is so weak that it is not strong enough to generate new jobs for the new entrants in the labour force, let alone to find jobs for the 15 million Americans who would like a job and can't get one."

Stimulus

A second round of stimulus measures "needs to be focused more on returns on investment, education, infrastructure, technology. And if you do those kinds of high-powered investments, the long-term national debt will be actually lower and the growth in the future will be higher," he said.

"This is an anaemic recovery, and is likely to remain anaemic. Unfortunately, with savings going up to 5pc, 6pc, 7pc, aggregate demand is going to be weak," he said.

"The only thing to fill it is the government."

In his separate interview, Mr Gross agreed, saying the US needed to institute some kind of industrial policy or state-oriented capitalism.

Specific measures should be directed at investments in infrastructure, re-education and green energy instead of "pushing money into the consumption hole", he said.

"What they really need to do is hark back to something like the Civilian Conservation Corps or the Reconstruction Finance Corporation: something that sounds so old that it isn't applicable to the modern era, but really would keep and put people back to work in a specifically directed area," Mr Gross added. (Bloomberg)

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