Fed should cut rates to 1 percent: Pimco's Gross

A trader works on the floor of the New York Stock Exchange October 6, 2008.

LONDON (Reuters) - Influential investor Bill Gross called on Tuesday for the Federal Reserve to cut interest rates to 1 percent from the current 2 percent because of sharp falls in asset prices globally.

"We are experiencing asset deflation and the threat of headline inflation is long past," he said in a note.

Gross is chief investment officer of U.S.-based Pacific Investment Management Co., or Pimco, and manager of the world's biggest bond fund.

He said the Federal Reserve needed to come up with a systematic solution to the current crisis including acting as a clearing house to guarantee that institutional transactions clear, and buying commercial paper outright.

Gross said investors should expect a lengthy recession but not a depression.

"It is best to focus on the potential unfreezing of commercial paper and a globally coordinated policy rate cut," he said.

"Own the front ends of Treasury/LIBOR yield curves. Agency mortgage-backed securities will also benefit from Treasury buybacks. Stay liquid, remain in high quality."