Analyst: Despite Soaring Employment, Fed Will Cut - Closing Bell

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Jan.05

4:30 PM ET

Friday, 5 Jan 2007

Analyst: Despite Soaring Employment, Fed Will Cut

Posted By:Lee Brodie

Topics:Employment | Economy (U.S.) | Treasuries | Interest Rates

Pimco's Bill Gross is calling for four rate cuts this year with the benchmark 30-year bond going down to 4.25%. But will that really happen in light of today's stronger-than-expected payrolls report? On CNBC’s "Closing Bell," Maria Bartiromo asked the bond maven what he thought.

As you might expect, Gross is not changing his prediction. “The employment report was strong," he said, "and it’s been strong for the past three months, suggesting employment is doing quite well."

"I would simply point out employment is a lagging indicator," he continued. "When the Fed moves, they will respond to rising unemployment, and we haven’t seen that yet. We need to see an unemployment rate of 4.6% or 4.7% before the Fed moves. But I expect that at some point in April or May of this year."

Bartiromo asked where the nominal growth rate is headed. Gross predicted real growth of 2% and inflation of 2% as well, which is a nominal rate of 4%.

If we see the Fed cuts four times in 2007, that will help "re-liquefy" the domestic economy, Gross says, and give a boost to equities.

"We have other influences to look at here," says Gross. "That’s why commodities in recent weeks have been quite important in terms of the outlook. The oil price is quite important in terms of where I think we go from here because the recycling of petro-dollars is a liquefying process. And to the extent that oil doesn’t go up, in fact goes down, some of that liquidity is withdrawn."

"So you have the Fed and you have the petrodollar nations both acting as influences going forward," Gross concluded. "One is probably positive, as interest rates come down – the other in terms of oil prices is probably problematic."