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Legendary Financier Bill Gross Blames These Two Factors for Inflation

Inflation remains at a 40-year high, suggesting that the Federal Reserve should remain aggressive in raising rates.
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For several weeks now, consumers have been taken in by a bad surprise. 

When they arrive at the checkout, the bill for their groceries has risen sharply and is nothing like the cost of the same products purchased a few days earlier. 

The price of gas at the pump remains high for vehicle owners when they go to fill up with gas. Things don't seem to be improving. U.S. inflation accelerated to a fresh forty-year high last month, the Bureau of Labor Statistics announced on July 13.

The headline consumer price index for the month of June was estimated to have risen 9.1% from last year, up from the 8.6% pace recorded in May and firmly ahead of the Street consensus forecast of 8.8%. The June reading was the fastest since December of 1981.

Uncertain Times

These bad data confirm those who believe that the Federal Reserve (Fed) will be even more aggressive in its policy of raising rates in order to curb this inflation. The CME Group's FedWatch tool is showing an 85.8% chance of a 75 basis point rate hike late this month, as well as a 35% chance of the 100 basis point move, a bet that was essentially at 0% just a week ago, as reported by TheStreet's Martin Baccardax

This aggressive monetary policy and inflation should cause a recession, experts believe. Businesses have to be prepared for tough times. Google has for the first time since the financial crisis announced a pause in hiring.

"The uncertain global economic outlook has been top of mind," Sundar Pichai said in a recent internal memo reviewed by TheStreet. "Like all companies, we’re not immune to economic headwinds. Something I cherish about our culture is that we’ve never viewed these types of challenges as obstacles."

The legendary financier Bill Gross, co-founder of bond giant Pacific Investment Management Co.(PIMCO), believes that this disastrous situation could have been avoided. The culprits for him are the Fed and Washington which have flooded the economy with cheap money in the form of stimulus packages and interest rates near zero.

"In the past few years beginning with Covid, that outstanding credit in the U.S. has expanded from $75 trillion to $90.5 trillion in a misguided effort to stabilize asset prices, inflation, and economic growth," Gross writes in his investment outlook published this week on his website. "This annualized 9% growth rate in government and private debt (mortgages, credit cards, corporate, etc.) was more than historic. It resembled a supernova star explosion, nearly double prior growth rates."

'Ignorant' Federal Reserve

"Responsible culprits of course were Washington’s multi-trillion-dollar deficits, an ignorant – yes ignorant -- Federal Reserve that kept yields near zero and even bought Treasury and mortgage-backed bonds until May of this year, and of course a willing investment public characterized by 'meme apes' and their 'to the moon' hyped forecasts."

He then added that: "We now have bear markets in most financial assets and a strong possibility of recession – duration and magnitude uncertain."

What to do then?

"First of all, it’s important to acknowledge that our domestic and global supernova represents a highly levered system, as investors have found out in the last 6 months," Gross, who retired in 2019, argued. "Raising interest rates to a 'neutral' level must consider this much like a drug addict would consider the steps for a healthy withdrawal."

He continues:

"'Cold turkey' in this case is definitely out, no matter what (Fed Chair Jerome) Powell says about inflation being his 'top' and nearly only policy consideration. This is not a time for Volcker-like policies. Raising rates too high, too soon, would not only threaten the long-term U.S. economic outlook but that of the rest of the world via a too-strong dollar."

The dollar and the euro are at parity since July 12, a first in 20 years. 

"So how high should rates go?" Gross asks.

"Stop at 3.5% but get there ASAP," the financier recommends.

The benchmark borrowing costs is currently at 1.75%.