Gross: Fed Will Hold Steady for Rest of Year

The Federal Reserve will hold its key interest rate at 2 percent for the remainder of the year as the economy winds through the various challenges it faces, according to bond manager Bill Gross.

Gross, who helms bond trader PIMCO, said on CNBC that he expects the central bank to take a cautious approach to monetary policy while bank writeoffs continue and inflation begins to ease.

"There's a lot of stress in the financial markets," Gross said. "Let's face it, this economy, the US economy and even the global economy is delevering, and when an economy delevers there are substantial problems and substantial risks.

"We've seen a lot of that. We've seen writeoffs in the hundreds of billions of dollars with more to come. But yeah, there's a lot of tenuous action in the financial markets these days and I expect more of it."

Gross said inflation will subside over the next year, presenting a challenge to the Fed.

"Inflation, as measured by the core which is what the Fed follows, is basically going to come down over the next 12 months and that means that the Fed funds level at 2 percent is certainly neutral and may not even be stimulative ... in terms of our significant asset deflation."

He said the Fed used necessarily cautious language when releasing its decision.

"The language in this statement and this debate have all the makings of a future Nobel Prize," Gross said. "The one that solves this puzzle can claim a piece of history."

© 2008 CNBC.com