PIMCO'S Bill Gross, who runs the world's largest bond fund, said on Thursday that he does not see the Federal Reserve pulling back from its quantitative easing policies until the U.S. unemployment rate at least drops to 6 percent.
Speaking at the IndexUniverse's Inside Fixed Income conference in Newport Beach, California, Gross said: "I'm basically saying they are not going to exit." He added, Fed Chairman Ben "Bernanke has basically said if QE3 doesn't work, there's more behind this."
Last Thursday, the Federal Reserve announced that it would start buying $40 billion in government-backed mortgage debt each month until the job market improves significantly.
Gross, who runs the flagship PIMCO Total Return Fund, said regardless of what investors think of the Fed's moves, the United States is entering a reflationary cycle rather than a deflationary one, meaning that investors should tilt their portfolios that way.
Gross added that investors should look to construct portfolios to focus on developing countries, investments with shorter durations with a bias toward 'real assets' and inflation-protected securities. He forecast that inflation will tick up between 3 percent and 3.5 percent in the next few years.
Gross's PIMCO Total Return Fund, which has more than $272 billion in assets, cut its exposure to U.S. Treasuries by one-third in August, the company said last week. The fund currently has about 50 percent of its holdings in mortgage-backed securities.
Gross said a debt crisis cannot be solved by printing more money. "That's an odd one," he remarked. "In the process of reflation, the Fed and ECB probably will promote more inflation than real growth. That's really probably what's going to happen."
In sum, "I don't think a debt crisis can be cured by more debt, but it can inflate an economy and stop deflation," he said.
(Additional reporting by Jennifer Ablan; Editing by Steve Orlofsky)