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Pimco's Gross: Fed Could Learn from European Banks

The European Central Bank and the Bank of England should serve as an example of how to manage an economy suffering through stagnation and liquidity issues, PIMCO Chairman Bill Gross told CNBC/Europe Thursday.

Bill Gross
Bill Gross

Gross said that the two European entities have adopted a more conservative approach on interest rates, something the US central bank badly needs to adopt as the housing slump acts as serious drag on then broader national economy. The Fed cut rates another quarter-point Wednesday to lower the fed funds rate to 2.00 percent.

"We simply think at this point the Fed at 2 percent has done what they can and now they have to do other things in terms of liquidity provisions, much like the Bank of England has done, the ECB has done," the head of the world's largest bond investment firm said. "We've got to look to fiscal measures in terms of housing price support."

While Gross has generally supported the Fed policies, he said this week's cut sent the central bank "over the line" and needs to find the middle ground like its counterparts in Europe.

The Bank of England has been criticized for holding out against rate cuts, but has moved recently to address the country's liquidity problems through a swap plan that lets banks trade in hard-to-swap assets for risk-free government debt.

"Obviously the Bank of England and ECB have been liquidity providers and I think that's been a good approach," he said. "The BOE is sort of in the middle. They've lowered interest rates and provided liquidity.

"The ECB has short of held the line and provided term liquidity when needed. To my way of thinking as a bond person, as a vigilante, I think the ECB'c got it right. ... They've held the line in terms of inflation fighting. That's really what a bond investor wants."

As for the US bank, Gross called for imagination when dealing with the housing situation, in which sales so far are 18.4 percent below the pace in 2007.

"An asset deflation of that proportion has to be stopped, and so let's be brave about it, let's be adult about it and suggest provisions that don't reward speculators but stop a 10, 15, 20 percent further decline in housing prices."

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