Pimco's Gross: Fed Can't Raise Rates Due to Economy

The Federal Reserve's decision to hold the line on interest rates was the only move the central bank could make considering the state of the US economy, PIMCO chief Bill Gross said on CNBC.

Reacting to the Fed's move to hold its key interest rate at 2 percent, Gross called talk of rate hikes "comical."

"We're in a recession. When has the Fed ever raised rates in a recession?" he said. "Unemployment is headed toward 6 percent, mortgage rates on home buyers are at 7 percent, and these guys want to raise rates?"

Gross said the central bank has a responsibility now to provide liquidity.

"We're in an asset deflation of near-historic proportions. That calls for the use of the government's balance sheet and not for the Federal Reserve to raise interest rates," he said. "To the extent that the central banks now must prevent that deflation, interest rates don't go up, they go down."

Watch the Gross interview in video at left.

However, Gross said the Fed cannot lower its key rate, but rather he called on central banks across the world to examine their monetary policy.

"In the US, 2 percent is pretty much the floor. I think the Fed made that clear," he said. "They're going to provide liquidity in different forms and fashions."

As for investments at this point in the market, Gross advised against junk bonds and toward government-backed securities.

"We want to stay under the umbrella to the extent that we have an umbrella that shelters large banks and to the extent that we have an umbrella that shelters the agencies, Fannie and Freddie , that's where you want to be," he said. "Why mess with junk bonds? Let's stick to high quality and stay under that umbrella. Let's stay dry."

© 2008 CNBC.com