Total 100 pts Rate Cut in 2007, says Bill Gross

Bill Gross, the widely respected Guru of Bonds and Managing Director of Pimco, the world's largest bond fund, predicted in an article on the Pimco website that the Federal Reserve would go for rate cuts totaling 100 points which will reduce the fed funds short-term rate from its current level of 5.25% to 4.25% by late 2007.

On Friday, Treasurys sold off on worries that surprisingly robust jobs creation in December would make it hard for the Fed to cut interest rates anytime soon and some even started talking about rate hike making the investors of both stocks and bonds nervous. Early on that day, the Labor Department reported that 167,000 jobs were generated and average hourly earnings jumped by 8 cents or 0.5% last month.

The most recent estimate of inflation placed 3rd-quarter real gross domestic product (GDP) at a 2% real seasonally adjusted annual rate, slightly lower than a prior estimate of 2.2% , and marking the slowest growth since the 4th quarter of 2005. However, Gross said that the Federal Reserve would be most interested in nominal GDP, a different measure that, unlike real GDP, does not reflect the impact of inflation. Nominal GDP fell to a 3.8% growth rate in 3rd quarter from its 2nd quarter number of 5.9%. During the past 15 years, the economy has trended to an average nominal growth rate of 5%, according to Gross. The Fed this year will need to drop the overnight rate to 4.25% to recapture that level of nominal growth, he wrote.

"Many investment managers are almost oblivious to nominal U.S. GDP levels these days – as a matter of fact, the Commerce department itself nearly buries the nominal number 8 or 9 paragraphs deep in its quarterly press releases. There are times when you can’t even find it in the text. But it is nominal, not real GDP that reflects the return on a nation’s capital, and nominal GDP that points towards our ability to pay our bills," wrote Bill Gross.

Here is the full article at Pimco site. [photo courtsey: Pimco]