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Pimco's Gross: Fed Will Need To Cut Interest Rates Soon

CNBC.com
Tuesday, 7 Aug 2007 | 4:47 PM ET

A top bond fund manager said the Federal Reserve will ultimately need to lower interest rates in order to counteract a slowdown in the U.S. economy.

Bill Gross, founder and manager of the PIMCO Total Return Bond Fund said the Fed's decision to keep interest rates unchanged at 5.25% was expected but future action should be taken.

Bond-a-Thon
The smart money reaction to the Fed's statement, with Ken Volpert, Vanguard Total Bond Market Fund manager; William Gross, PIMCO Total Return Fund manager; and CNBC's Erin Burnett

The Fed decision came amid volatile trading on Wall Street as investors have been concerned with global credit markets as defaults on subprime mortgages continue to rise.

In a brief statement, the Fed said "credit conditions have become tighter" for some businesses but the economy is likely to continue to grow at a moderate pace.

"It's an academically-oriented Fed and I think they went by the textbook here, they moderated the language and changed it step-by-step," Gross said.

Gross said a gradual slowdown in the U.S. economy has been lost amid concerns regarding corporate credit and policymakers to cut rates at some point.

"The Fed needs to recognize is that at five-and-a quarter it's a restrictive rate relative to a 4% to 5% nominal GDP world," said Gross. "Ultimately, they are going to have to cut."

"The Fed needs to watch the markets but it also needs to watch the economy," he added.

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