Pimco spoke with Treasury, Fed as credit froze

NEW YORK (Reuters) - Bill Gross, manager of the world's largest bond fund, said he consulted with high-ranking Treasury and Federal Reserve officials around the time the U.S. central bank slashed its discount rate on August 17.

"I and other PIMCO professionals were attempting to describe to high-ranking Treasury and Fed officials the near-frozen commercial-paper markets and the draining confidence of bond and stock investors worldwide," Gross, the chief investment officer of Pacific Investment Management Co., said in his October investment outlook letter released on Monday.

Gross on Wednesday said he was contacted by both the Fed and Treasury but declined to comment on which officials were involved in those discussions. "PIMCO was in touch with both Fed and Treasury officials between the week of August 14 and 21," he added.

Federal Reserve Chairman Ben Bernanke consulted with financial experts including Wall Street executives and former Treasury Secretary Robert Rubin as credit market turmoil deepened in August, according to records recently made public. Those records do not show Gross as one of Bernanke's contacts for that period.

U.S. stocks tumbled August 9 on worries about mortgage delinquencies and the Fed made an announcement the next day that it would pump money into the banking system to keep financial markets running normally.

After stock markets continued to slide, the Fed slashed its discount rate on August 17 and its benchmark federal funds rate a month later by an aggressive half percentage point to 4.75 percent.

Even so, Gross said the credit and housing crisis will dominate Fed policy "over the next several years" and believes short-term interest rates could fall to 3.75 per cent over the next six to 12 months.

(Additional reporting by Mark Felsenthal and Burton Frierson)