At least it kind of seems that way. On October 6, the bond king wrote in his much-read investment outlook that the Federal Reserve should start buying commercial paper—short-term notes companies use to fund working capital. The next day, with the commercial paper market in full lock-down, the Fed said it would start a program do just that. Today the Fed announced that PIMCO, Gross’s firm, would run it.
I’m not suggesting anything nefarious—it’s hardly a stretch to imagine how PIMCO, one of the biggest bond shops out there, is the most qualified outfit for the job. And anyway, the Fed was thinking about buying commercial paper before Gross trumpeted the idea.
Still, I thought it worth going back and seeing what else Gross was calling for last week. Could it, perhaps, help predict our future? Here’s the relevant paragraph:
A systemic delevering likely requires a systemic solution, which moves beyond cyclical interest rate cuts, liquidity provisions, or even the purchase of subprime mortgage-backed bonds. We believe that the Federal Reserve must now act as a clearing house, guaranteeing that institutional transactions clear (and investors receive) their Big Macs at the second window. They must also take another bold step: outright purchases of commercial paper. They should also cut interest rates to 1%, because we are experiencing asset deflation, and the threat of headline inflation is long past.
The federal funds rate is currently at 1.5%, after it was cut from 2% on October 8. So, yeah, going to 1% would be some more bold action.
Then there’s that idea of the Fed acting as a clearinghouse for trades of financial instruments like credit default swaps—i.e., Big Macs that you pay for at one window before driving ahead 20 feet to collect. Yep, we’ve got people working on that too.