By Ros Krasny
NEW YORK (Reuters) - Tuesday's cut to the Federal Reserve's key lending rate is another baby step toward much lower rates in 2008 as the Fed tries to prevent a housing-led recession, Bill Gross, chief investment officer at PIMCO, the world's largest bond fund, said.
The Federal Open Market Committee trimmed the federal funds rate by one-quarter basis point, to 4.25 percent, taking its total easing since mid-September to a full percentage point.
Speaking ahead of the FOMC decision via telephone to the Reuters Investment Outlook 2008 Summit in New York, Gross, manager of the $111 billion Pacific Investment Management Co. Total Return Fund, reiterated the firm's view that fed funds will hit 3 percent in 2008.
The final FOMC meeting of 2007 likely saw the Fed "divided," Gross said, with Chairman Ben Bernanke, Vice Chairman Donald Kohn and influential bank presidents like San Francisco's Janet Yellen opposed by "some significant new hawks" who are wary of inflation.
Ultimately, though, rates must go a lot lower given subpar economic growth created by a lingering slowdown in the housing market and its spillover effect on consumer spending, he said from his Newport Beach, California, office.
"Typically, in past recessions or near-recessions, the Fed has eased to a 1 percent real rate," or the equivalent of a nominal fed funds rate of about 3 percent, Gross said.
Short-term rates should remain at low levels until the Fed sees housing prices leveling off, he said.
MORTGAGE RATES MUST FALL Continued...
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