The holidays have come and gone, and in their wake, all the inflation fears that the Federal Reserve unleashed with its December announcement have come unfurled—with PIMCO bond guru Bill Gross leading the charge.
The Fed in its fourth round of quantitative easing, or QE4, is now writing $85 billion of checks to buy Treasuries and mortgages every month, and there's really nothing backing those checks other than trust, writes Gross (left) in his January investment outlook, "Money for Nothin', Writing Checks for Free."
The future price tag of printing such checks is inflation and currency devaluation, Gross warns, while blaming the Fed's Dec. 12 decision to set rates based not on date targets but rather on specific unemployment and inflation rate levels.
Economic growth "now is to be measured each and every employment Friday via an unemployment rate thermostat set at 6.5%," Gross writes. "We at PIMCO would not argue with that objective. Yet we would caution, as Bernanke himself has cautioned, that there are negative consequences and that when central banks enter the cave of quantitative easing and 'essentially costless' electronic printing of money, there may be dragons."
Risks Are Long Term
Gross advises investors to be alert to the long-term inflationary risk of such check writing.
"While they are not likely to breathe fire in 2013, the inflationary dragons lurk in the 'out' years towards which long-term bond yields are measured," he writes. "You should avoid them and confine your maturities and bond durations to short/intermediate targets supported by Fed policies."
PIMCO's bond king is not alone in warning about inflation risks this January. Martin Feldstein, a Harvard professor and chairman of the Council of Economic Advisers under President Ronald Reagan, writes in a Wednesday opinion for The Wall Street Journal that the Fed is creating dangerous asset-market bubbles that will lead to higher future inflation as well as "explosive growth" of the national debt.
