Pimco’s Gross Says Fed Will Slash Rates to 4.25%

The market fell today on release of the December jobs report that showed the labor market added more jobs than expected.  The minutes from the Fed’s December meeting, released earlier this week, reiterated its hard-nosed stance on inflation. So, any data that suggests that the economy is overheating creates fear of a rate hike.  The problem is that the data is all over the map depending on which survey you choose to believe. 

Mr. Bonds, Bill Gross, believes that the Fed’s bark is bigger than its bite and its next move is a reduction in interest rates.  If I was a betting man and I am – I would bet on Mr. Gross.  The housing recession is worst than most are willing to admit.  A hike in interest rates will lead to the housing market going down for the count.

 

By Elizabeth Stanton and Chris Cooper

Jan. 5 (Bloomberg) — Bill Gross, manager of the world’s biggest bond fund, says the Federal Reserve will lower its benchmark interest rate by a percentage point to 4.25 percent this year to support economic growth.

The Fed will start cutting its target for the overnight lending rate between banks in the first half as the economy slows, he said. The nominal growth rate, unadjusted for inflation, was 3.8 percent during the third quarter, compared with 5.9 percent in the second quarter.

“Slower economic growth, certainly slower nominal growth, ultimately forces the Fed to lower the cost of funds”, Gross, chief investment officer at Pacific Investment Management Co., said in an interview. “The rate may be cut to below the nominal growth rate in order to re-stimulate assets and re-stimulate productive growth in the economy.”

Ten-year U.S. Treasury note yields will fall to about 4.50 percent, Gross wrote in a report published on his firm’s Web site yesterday. The 10-year yield, 4.60 percent at 5:08 p.m. in Tokyo, has risen in the past two years.

The Newport Beach, California-based firm, a unit of Munich- based Allianz SE, oversees $642 billion, including the $100 billion Pimco Total Return Fund.

So-called nominal growth in U.S. gross domestic product of 4 percent “is not enough to support an asset-based economy which has built-in costs of debt averaging 5 percent plus,” Gross wrote in the report.

With a decline to 4.50 percent yield at year-end the 10-year note would return about 5.4 percent, according to data compiled by Bloomberg. It would be the biggest gain since it returned about 15 percent in 2002, according to index data compiled by Merrill Lynch & Co.

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