More Fed Rate Reductions Says Bill Gross of PIMCO
Bill Gross of PIMCO is one of my monthly reads. He is the widely known Chief Investment Officer for Pacific Investment Asset Management Company (PIMCO), one of the largest fixed-income money managers in the world.
The October, 2007 edition of his Monthly Investment Outlook is bearish about the economy. Mr. Gross expects housing prices to decline because of a potential blow up of the credit markets. In short, Mr. Gross and the gang at PIMCO aren't so sure that the credit meltdown is over. From Bloomberg.com today:
Sales of new homes tumbled 8.3 percent in August to the lowest in more than seven years and house prices dropped the most in four decades, the Commerce Department in Washington said last week. Consumer confidence fell to the lowest in almost two years in September, according to the Conference Board's index of confidence.
``The big picture is you're going to have a consumer that is going to be pulling back significantly,'' Pimco's Kiesel said. ``The rate cuts by the Fed are unlikely to save housing.''
The Fed's Sept. 18 reduction of its target federal funds rate to 4.75 percent was ``intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets.''
Bill Gross thinks the the result will be a Fed Funds rate that is a full percentage point lower, than it is today, within 6-12 months:
PIMCO’s view is that a U.S. Fed easing cycle historically has required a destination of 1% real short rates or lower. Under a conservative assumption of 2½% inflation, that implies Fed Funds at 3¾% or so over the next 6-12 months. Actually that’s only two, 50 basis point reductions, something that could, but probably won’t, be accomplished by year-end. Don Kohn’s asymmetric elevator will likely be interrupted by false hopes of a housing bottom, fears of a dollar crisis, or misinterpreted one month’s signs of employment gains and faux economic strength. The downward path of home prices, however, 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 conduit holders.
Bill Gross is NOTORIOUSLY early in his predictions BUT, he's always right. Expect the Fed to opt for saving Jane Q. Homeowner by lowering rates rather than propping up Daddy Warbucks by protecting the dollar's value.
