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Pimco's Gross: Rate Cut Coming, But Not in October

Reuters
Tuesday, 16 Oct 2007 | 1:26 PM ET

The Federal Reserve will cut interest rates again but probably not at the October policy-making meeting, said Bill Gross, manager of the world's biggest bond fund on Tuesday.

The Fed's target rate for federal funds is on a downward track because of slower economic growth, said Gross, the chief investment officer of Pacific Investment Management or PIMCO, speaking on CNBC television.

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"The Fed needs to cut interest rates probably as low as 3.75 (percent) before we are all done," he said.

"(Interest rates) need to be based upon where housing is going, based upon where retail sales are going and where the consumer is," said Gross.

Depending on the U.S. economy's rate of growth, Fed policy-makers could cut interest rates by 100 basis points over the next six to nine months, he said.

The Fed last month cut the benchmark federal funds target rate by 50 basis points to 4.75 percent to buffer the economy from a housing slump and financial markets turbulence.

It was the first monetary policy easing in four years and the extent of the cut surprised many market participants. The next policy-setting meeting will take place on Oct. 30-31.

The Federal Reserve is concerned about the real economy but also needs to provide some stability to financial markets, Gross said.

He said a plan by major banks to set up a bailout fund reflects continuing need for liquidity in the financial community, particularly by Citigroup.

Bank of America, Citigroup and JPMorgan Chase on Monday said they plan a fund aimed at preventing the dumping of billion of dollars of bonds linked to subprime mortgages and other debt.

Gross added that the rate of 3-month LIBOR (London Interbank Offered Rate) should be 35 basis points lower than its current rate of 5.21 percent.

A high level of the three-month LIBOR indicates that banks are concerned about other banks' ability to repay loans, he said.

Gross also said that equities were reasonably valued relative to the level of interest rates.

He also said what while the Federal Reserve is focused on core inflation, which strips out volatile food and oil prices, former board chairman Alan Greenspan has said that oil prices should be considered in decision-making.

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