Gross pulling the plug this week -- he just said Fed Funds rate should be 3% -- selling TLT
Pimco's Gross Says Fed May Have to Cut Rates Below 3% (Update1)
By Sandra Hernandez
Dec. 5 (Bloomberg) -- Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., said the Federal Reserve may have to lower its benchmark interest rate below 3 percent to support the economy.
The central bank's rate cuts so far have ``lowered Treasury yields, but for the rest of the market -- the segment that influences the bottom line of U.S. corporations, homeowners, and consumers -- not much has changed,'' Gross wrote on the company's Web site. ``To restart a near recessionary economy we may need to eventually go down to 3% or lower.''
Traders see a 100 percent likelihood the Fed will cut its 4.5 percent target rate for overnight lending between banks by at least a quarter-percentage point on Dec. 11, according to futures contracts on the Chicago Board of Trade. The central bank slashed its target by a half-point in September and by a quarter-point in October, its first cuts since 2003, as mounting losses on mortgage-related debt spurred concern that the economy would shrink.
The yield on two-year Treasury notes, which are more sensitive to expectations about Fed policy than longer-maturity debt, have fallen 100 basis points since the Fed's rate cut on Sept. 18, to 2.97 percent today.
Paul McCulley, a fund manager at Pimco in Newport Beach, California, said in an interview on Nov. 20 that the Fed may drop its key rate below 3 percent.
Pimco, a unit of Munich-based insurer Allianz SE, managed $721 billion as of Sept. 30. Gross manages the $108 billion Pimco Total Return Fund.
To contact the reporter on this story: Sandra Hernandez in New York at shernandez4@bloomberg.net .
Last Updated: December 5, 2007 09:39 EST
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