Pimco's Gross Says Fed Rate Cut a `Sad Testament' (Update3)
By Kathleen Hays and Deborah Finestone
Jan. 22 (Bloomberg) -- Bill Gross, manager of the world's biggest bond fund, said the Federal Reserve's emergency cut in borrowing costs today is a ``sad testament'' to the state of the U.S. economy.
The central bank cut the target overnight lending rate to 3.5 percent from 4.25 percent after stock markets tumbled from Hong Kong to Paris amid increasing signs of a U.S. recession. Policy makers weren't scheduled to gather until next week. Gross expects the rate to fall as low as 2.50 percent.
``It's a sad testament to think the Fed has to cut interest rates eight days in front of a meeting to salvage the equity markets,'' said Gross, the founder and chief investment officer of Pacific Investment Management Co., in a Bloomberg Television interview. ``The U.S. economy is in a rather sad state of affairs in that it depends on housing and stock prices to keep going.''
Today's rate cut is the biggest single reduction since the central bank began using the rate as the principal tool of monetary policy around 1990.
The central bank has reduced its target for the overnight lending rate between banks four times from 5.25 percent since September. Gross predicted on Jan. 4 the Fed will eventually lower rates to around 3 percent.
He declined to specify whether he expects policy makers to lower interest rates again next week.
`Sooner The Better'
``We need a fed funds level at 2.5 percent to 3 percent,'' Gross said. ``The sooner the better.''
The $112.7 billion Total Return Fund earned 12.1 percent in the year through yesterday, outperforming competitors in the intermediate bond fund category, according to data from Morningstar, the Chicago-based research firm.
Gross has predicted since September 2006 that the Fed would lower borrowing costs and was bullish on Treasuries. The central bank cut rates for the first time in four years this past September.
Ten-year Treasury yields fell to 3.48 percent, the lowest since June 2003. Yields on two-year notes, more sensitive to changes in monetary policy, dropped the most since 2001 today to 2.04 percent.
Treasuries of all maturities have returned 2.3 percent since Jan. 1, the best beginning of a year since at least 1986, according to an index compiled by Merrill Lynch & Co.
``You would have to think the Treasury rally is almost over,'' said Gross. ``It's a safety-only type of vehicle. It certainly doesn't provide an attractive return.''
Gross runs the Total Return Fund for Newport Beach, California-based Pimco. The firm, a unit of Munich-based insurer Allianz SE, manages about $744 billion.
To contact the reporter on this story: Kathleen Hays at
khays4@bloomberg.net ; Deborah Finestone in New York at
dfinestone@bloomberg.net
Last Updated: January 22, 2008 16:09 EST