Bill Gross: Brexit Is Just the Beginning

In its July policy statement, the Federal Reserve might have limited its language around last month’s volatile Brexit vote that severed the U.K.'s membership in the European Union, but bond king Bill Gross said it’s only just the beginning of a revolution of sorts.

Continue Reading Below

“The middle class are hesitant going forward, if that’s a mild way to phrase it,” he said. “Brexit is a good indication of problems ahead. We’re just not seeing them in July and August.”

At the conclusion of its two-day policy meeting Wednesday, the Fed kept interest rates steady, but struck a more hawkish tone on the health and strength of the U.S. economy. The central bank said near-term risks have faded thanks to a labor market that has continued to gain strength despite what now seems to be an anomaly of just 11K jobs being created in May.

The Fed, however, said it will continue to closely monitor inflation in the U.S. and any new developments across the global economy and financial markets.

Gross said while the Fed’s decision wasn’t a surprise to anyone, he expects to hear more about its future plans for rates at the Economic Symposium in Jackson Hole, Wyoming next month. The high-profile Fed conference comes during a month absent a Federal Open Market Committee meeting, and after the July decision that stood on its own without a press conference from Chair Janet Yellen.

“I think at that point, we’ll hear from Janet Yellen about what she plans to do,” Gross estimated. “I think we have one hike in the next six months or so, that’s pretty much what the markets are looking for, but not much more than that.”

As the Fed prepares to raise interest rates in the U.S. for the first time since December, other global central banks including the European Central Bank and the Bank of Japan have kept stimulus measure flowing, and pulled rates into negative territory. That poses a conundrum for the Fed, which has attempted to keep the U.S. dollar from strengthening too much as to drive away investment, while keeping the economy on a path to growth.

“[The BOJ and the ECB] are purchasing, and this is hard to believe, $180 billion worth of bonds per month, which is more than three times the net issuance of U.S. Treasuries,” Gross explained. “It’s no wonder interest rates are negative there, and it’s no wonder in the U.S. interest rates are where they are.”

He advised investors to stay away from investing in U.S. government debt, which at this point yields very little. On Wednesday the yield, which moves inversely to price, on the 10-year U.S. Treasury note declined 0.045 percentage points to 1.516%.

“I think yields are too low and stocks are relatively high. There’s a lot of risk out there. Put [your money] in some relatively low risk investments that will reduce the return, but certainly reduce the risk as well,” he said.