In the wake of the Federal Reserve's aggressive half-point interest rate cut to 4.75% last month and expectations more are in store as it deals with the subprime crisis, Bill Gross, manager of the world's largest bond fund, said the central bank's fixation on housing wasn't likely to end soon. "The downward path of home prices ... will dominate Fed policy over the next several years as will the lingering unwind of related financial structures and derivatives that have yet to be discovered by the public, and marked to market" by their holders, Gross, the chief investment officer at PIMCO (Pacific Investment Management Co.), said in his monthly report to investors. He believes the Fed probably will cut the fed funds rate further to 3.75% within the next six-to-12 months. If rates don't fall enough, he said, Fed Chairman Ben Bernanke "risks exacerbating a housing crisis," noting that after nearly 12 months of declines "only now is the Fed responding to an unfolding crisis." Possibly delaying any cuts, he said, are "false hopes" of a housing bottom or fears of a dollar crisis or misinterpreted indications of economic strength.
Sources: Reuters, MarketWatch, Bloomberg
Commentary: Housing Prices Will Continue to Fall - Greenspan • What Credit Markets Say About The Next Fed Move • Things Have Normalized... Or Have They?
ETFs: SPY, DIA, AGG
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