2008 will be “tumultuous” and the Federal Reserve may need to bring its interest rate below 3%, bond fund manager Bill Gross of Newport Beach-based Pacific Investment Management Co. said last week.
“To restart a near recessionary economy we may need to eventually go down to 3% or lower,” said Gross, chief investment officer of one of the world’s largest bond fund managers.
Historically, rate cuts have gone to 1% with recessions. After factoring in inflation, the Federal Reserve would have to go to 3% to achieve a similar effect, Gross said.
The Federal Reserve’s federal funds rate now is at 4.5% and is expected to go to 4.25% this week.
Gross also wrote on Pimco’s Web site that “What we are witnessing is essentially the breakdown of our modern day banking system.”
He called the financial system so complex that Federal Reserve Chairman Ben Bernanke had to get a refresher course from hedge fund managers in August.
Gross also said that recent rate cuts have helped to lower Treasury bond yields but have had little effect on corporations, homeowners and consumers.
Treasury yields have fallen faster than corporate bonds as investors flock to the safety of government debt.
The Federal Reserve already has been cutting rates.
In October the Federal Reserve lowered its overnight borrowing rate between banks to 4.5% from 4.75%. In September it lowered by a half point.
Gross in October said he thought the Federal Reserve ultimately would lower its rate to 3.75%, calling the subprime credit collapse a “$1 trillion problem.”
Pimco manages $720 billion as a unit of German-based Allianz SE.
Gross’s Pimco Total Return Fund is up almost 9% for the year.
,Dan Beighley
