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The managing director of bond giant PIMCO issued a dire warning about the Federal Reserve's decision to keep the federal funds rate near zero through 2013. Bill Gross wrote a commentary for the Financial Times in which he said the central bank has essentially made two-year yields the same as the overnight fund rates "allowing for no incremental gain — a return that leveraged banks and lending institutions have based their income and expense budgets on." Gross said this affects not only banks, but investment firms that have client guidelines which impose maturity caps. "By flooring maturities out to two years then, and perhaps longer as a result of maturity extension policies envisioned in a forthcoming operation twist later this month, the Fed may in effect lower the cost of capital, but destroy leverage and credit creation in the process," Gross said. "The further out the Fed moves the zero bound towards a system wide average maturity of seven to eight years the more credit destruction occurs, to a U.S. financial system that includes thousands of billions of dollars of repo and short-term financed-based lending that has provided the basis for financial institution prosperity," he said. Gross, who has a penchant for peppering financial analysis with dramatic visuals, says "Helicopter Ben" should be mindful to ensure he avoids a Black Hawk Down type of scenario. This is not the first time Gross has criticized Fed policy. In early June, he described the Fed's overly expansionary monetary policies with references to leaping frogs and dead frogs to highlight his belief the government was excessively focused on its own balance sheet, leaving bond investors to fend for themselves. Write to Kerri Panchuk.

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