The Federal Reserve could lower interest rates later this year as the subprime mortgage fallout spreads to the broader economy, said Bill Gross, chief investment officer for Newport Beach’s Pacific Investment Management Co.
Meanwhile, economists at Chapman University weighed in on interest rates Tuesday, saying they don’t see a cut this year but the prospect of one next year.
Gross predicted the Federal Reserve’s federal funds rate, which stands at 5.25%, will head lower in the next six months.
Higher mortgage payments, delinquencies and defaults are set to put more pressure on consumer spending and homebuilding, Gross said.
Gross attributed the mortgage fallout to the easy lending amid low interest rates that helped finance homes from 2004 to 2006.
“The flaw lies in the homes that were financed with cheap and in some cases
gratuitous money,” he said.
Gross also said the recent collapse of two Bear Stearns Cos. hedge funds
from subprime losses is similar to that of the bust of hedge fund Long Term Capital Management in 2000, which sent shock waves throughout the world’s financial markets.
The Federal Reserve board meets this week on interest rates.
In the past couple of years, Gross has been off in his predications about interest rates.
Chapman University President James Doti forecasted a steady 5.25% rate through 2007.
In 2008 Doti sees a 50% chance for a rate cut.
Chapman economist, Esmael Adibi, said that after Sept. 11, 2001, the Federal Reserve made a mistake in lowering rates too much.
“There was too much liquidity that led to the subprime to increase. They let
it go too long,” he said.
Doti forecasted housing prices to decline about 4% for 2007, and for 2008 he
expected a 1% decline, then a rebound.
“A recovery will begin in 2008,” he said.
