Recession will prevent Fed rate hike: Pimco's Gross

NEW YORK (Reuters) - Recession and historic asset price deflation will prevent the Federal Reserve from raising U.S. interest rates, the manager of the world's biggest bond fund said on Tuesday.

"These concerns (among analysts) about the Fed raising interest rates are almost comical," said Bill Gross, chief investment officer of Pimco or Pacific Investment Management Co, speaking on CNBC television. Gross manages the $130 billion Pimco Total Return Fund.

He was speaking after the Federal Open Market Committee announced its decision to hold its key short-term lending rate, the federal funds target rate, unchanged at 2 percent.

"We're in a recession and when has the Fed ever raised interest rates during a recession," Gross said.

Recession and deflation of asset values should prevent the Federal Reserve from raising rates, he said.

Asked whether the retreat in commodity prices from recent record highs signaled a crash, Gross said it did not, but it appeared to be part of a broader decline in markets.

"Global stock markets are declining, global bond markets are declining in price, global commodities are declining in price," said Gross.

"This is an asset deflation of significant proportions and to the extent that central banks now must prevent that deflation then interest rates don't go up, they go down."

He said the Fed "is done" easing at 2 percent but monetary stimulus might become an issue for central banks in the UK, Australia and perhaps the euro zone.

Gross added that in the current environment of government intervention, he favored debt from mortgage giants Fannie Mae and Freddie Mac over high-yield, or so-called "junk" bonds.

Last week, U.S. President George W. Bush signed into law a rescue package aimed at resurrecting the housing market from its worst slump since the Great Depression and stabilizing Fannie and Freddie, which own or guarantee almost half the country's $12 trillion in home mortgage debt.

"Our view is that we want to stay under the government umbrella," Gross said.

"To the extent that we have an umbrella that shelters large banks and to the extent that we have an umbrella that shelters the agencies, Fannie and Freddie, then that's where you want to be."

(Reporting by John Parry and Burton Frierson; Editing by Neil Stempleman)