- The Federal Reserve's rate-hiking campaign could plunge markets into crisis next year, according to Bill Gross.
- "We've got potential chaos in financial markets," the billionaire investor said Tuesday.
- The housing and bond markets look particularly vulnerable, Gross added.
The Federal Reserve's ongoing monetary tightening campaign could fuel chaos in the US housing and bond markets, billionaire investor Bill Gross has warned.
The former PIMCO investment chief said Tuesday that he's worried that there could be a recession as well as market crises in 2023 if interest rates keep rising.
"The economy has been bolstered by trillions of dollars in fiscal spending, but ultimately when that is used up, I think we've got a mild recession," Gross told CNBC's 'Halftime Report'.
"If interest rates keep going up, we've got more than that," he added.
"We've got potential chaos in financial markets."
Gross warned that the US housing market could be particularly vulnerable to rising borrowing costs.
Market activity stalled in 2022 after record low interest rates in the previous two years fueled a potential housing bubble, with buyers put off by the average 30-year mortgage rate jumping 320 basis points to 6.31%, according to data from YCharts.
"The Fed has given homeowners the chance to term out their mortgages and borrow at 3% or 4%," Gross said. "If the Fed continues to raise rates the ability to equitize some of your housing, which is moving down in price, will be severely limited, and so that'll serve as a caution for the housing market."
The billionaire investor, famously known as 'bond king', also said that rising interest rates could create turbulence in fixed income markets.
The Fed has sparked what economists call a 'reverse currency war' in 2022, with central banks around the world battling to keep up with its aggressive rate hikes so they can avoid higher import costs and devaluation of their own currencies.
The Bank of Japan made its latest move Tuesday, loosening bond market yield curve controls – which investors believe will set the stage for interest rates in the Asian nation to move above 0% next year.
"Lots of money has been invested on the basis of shorting the yen and buying relatively safe alternatives like Treasurys or stocks," Gross said. "With the yen strengthening as opposed to weakening and interest rates moving a little higher this yen carry trade stands a good chance of being reversed."
"The 10-year is up 10 basis points on the basis of the BoJ's move last night," he added.
The Fed has hiked rates from near-zero to around 4.5% this year and signaled it'll keep its policy rate above 5% for all of 2023 in a bid to tame inflation, which has run close to four-decade highs.
But in an investment outlook published Tuesday, Gross said that the Fed has hiked rates enough to curb soaring prices and risks tanking the economy if it pushes them up any higher.
"The Fed should now stop raising rates and wait to see if the punch bowl has been sufficiently drained," he said.