Expectations of lowering fed funds rates

Pimco's Gross Expects Fed to Cut Rates to 3.5 Percent (Update1)
By Deborah Finestone

Oct. 29 (Bloomberg) -- Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., expects the Federal Reserve to lower benchmark interest rates to 3.5 percent to avoid a recession.

More conservative lending practices stemming from investors' reduced willingness to fund risky loans will induce a ``noticeable slowdown'' in credit growth, though not an outright contraction, Gross wrote in a report published on the firm's Web site today.

The Fed's target for overnight loans between banks will have to fall enough that interest rates will be about 1 percent above inflation, he said.

``An increasingly recessionary looking U.S. economy will likely require 1 percent real short rates and 3 1/2 percent fed funds in order to stabilize a potential growth contraction in lending not witnessed since the early 1970s,'' Gross said.

Earlier this month, he said the central bank will likely cut borrowing costs to 3.75 percent in the next six to nine months.

Gross, who manages the $106.5 billion Pimco Total Return Fund, has predicted for more than a year that the Fed will lower rates in 2007. The central bank reduced rates in September for the first time in three years.

Futures traded on the Chicago Board of Trade suggest a 98 percent chance the Fed will lower rates to 4.50 percent at its Oct. 30-31 meeting. The odds on rates declining to 4.25 percent by the Dec. 11 meeting are 69 percent.