Posted By thestatedtruth.com on August 6, 2010

Pacific Investment Management Co.’s Bill Gross said the 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.

Treasury two-year note yields dropped below 0.50 percent for the first time today after the Labor Department said the economy lost more jobs in July than economists forecast. The difference in yields between 2- and 10-year notes is 2.33 percentage points, more than double the average of 1.11 percent for the so-called yield curve over the past 20 years. The spread reached a record 2.94 percent on Feb. 18.

“When you analyze that portion of the curve, it says the Fed is on hold for a long, long time,” Gross, said today during a radio interview on “Bloomberg Surveillance” with Tom Keene. “When you get down to 50 basis points on two-years, that’s giving you a signal that there’s not much left on the table.”

Bill Gross, is the manager of the world’s biggest bond fund,“Hopefully as long as the curve stays steep and as long as the Fed stays where it is, then you produce two- to two-and-a- half returns as opposed to 50 basis points,” Gross said.

The Fed has maintained a range of zero to 0.25 percent for its benchmark rate for overnight loans between since December 2008 to encourage the economic recovery. Policy makers next meet on Aug. 10.

Gross, based in Newport Beach, California, said the benchmark 10-year note’s yield probably won’t fall below 2 percent and that equity markets have priced against deflation.

“What the market really thinks is that for the next two to three years, the Fed doesn’t do anything, but then magically nominal GDP and inflation reappear,” he said.

Companies in the U.S. added workers in July for a seventh straight month at a pace that suggests the labor-market recovery will be slow to take hold.

“The jobs that were will not be coming back and the unemployment rate of 4.5 percent is really a fiction of the levered era as opposed to the reality of the new normal,” Gross said.

An overdependence on debt has the global economy entering a period of fundamental transformation that Gross, 66, calls the “new normal.” Pimco says mounting deficits and tighter financial regulation will dampen growth in the U.S. and the euro zone for the next three to five years. Excessive leverage led to over-employment in finance, mortgage, investment banking and government jobs, Gross said

The U.S. economy faces long term structural unemployment near 7 percent, according Gross, which makes “a significant statement about the future of the U.S. economy and the safety nets that will be necessary for it.”

U.S. lawmakers need to institute some kind of industrial policy or state-oriented capitalism after promoting consumption and extending unemployment benefits, Gross said. Specific measures should be directed at investments in infrastructure, reeducation and green energy instead of “pushing money into the consumption hole,” he said.

“What they really need to do is hearken back to something like the CCC (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,” Gross said.

More at: www.bloomberg.com

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