Bill Gross: Fed Will Cut to 3.5%

In his Investment Outlook piece for Pacific Investment Management Co. [PIMCO]'s November newsletter, bond guru Bill Gross forecasts that the Fed will cut short-term interest rates to 3.5%. "An increasingly recessionary looking U.S. economy will likely require 1% real short rates and 3 1/2% fed funds in order to stabilize a potential growth contraction in lending not witnessed since the early 1970s," he writes. A few weeks ago, Gross said he expects the Fed to cut rates to 3.75% over the next 6-9 months. Bloomberg notes that futures traded on the Chicago Board of Trade put the odds of the Fed's lowering rates to 4.5% at its October 30-31 meeting at 98%. The odds of a rate cut to 4.25% at the Dec. 11 meeting are 69%. In the newsletter, Gross expresses skepticism about Treasury Secretary Henry Paulson's "Super-SIV" -- a consortium of banks that plans to buy at-risk securities to prevent their prices from going into freefall (full story). "Whether Paulson’s 'Committee to Save the World – Part II' will succeed like Bob Rubin’s original during the Long Term Capital crisis is debatable," he writes. "The idea...is counterproductive because it continues to hide subprime asset prices in the 'shadows.'"

Sources: PIMCO Investment Outlook by Bill Gross, Bloomberg, 24/7 Wall Street
Commentary: Bill Gross Wants A PIMCO Bailout • Housing to Hold Fed's Attention for Years, Pimco's Gross Says • Pimco Chief Bill Gross: 5-10% Correction May Be Ahead
ETFs to watch: SHY, IEF, TLT, TLH

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Comments

[Brian Croner]

Keep dropping the interest rate until subprime homebuyers can pay their bills. Even then, no guarantee it will work before even more capital power exits the US. Those who were never given equal economic opportunity in this country still have to have a place to shelter their families. Just because the rich were born into the privilege of a free house doesn't mean they are justified in owning the house before the poor. Capitalism is designed to be unfair, and that it is. The problem all of the sudden is it just isn't working anymore.