I guess some people will be disappointed.

Pimco\'s Gross Says Inflation, Credit Losses to Thwart Fed Cuts

By Thomas R. Keene and Sandra Hernandez

Feb. 20 (Bloomberg) -- Bill Gross, manager of the world\'s biggest bond fund, said accelerating inflation and widening credit losses may prevent the Federal Reserve from cutting borrowing costs to as low as 1 percent to revive the economy.

``Inflation, a weak dollar, and the fact that up until this point 225 basis points of easing have produced very little\'\' may give policy makers pause, Pacific Investment Management Co.\'s Gross said in an interview on Bloomberg Radio. ``There\'s a roadblock and we\'ll just have to see whether the tradeoff between inflation and the ultimate progress in terms of the credit markets is a viable one.\'\'

Gross, who manages the $120 billion Total Return Fund, said Jan. 22 that policy makers needed to reduce their benchmark rate to as low as 2.5 percent. The Fed slashed the federal funds target by 125 basis points to 3 percent in January, including an emergency 75 basis point cut the day of Gross\'s comments.

Traders see 92 percent odds the Fed will lower the target by a half-point to 2.5 percent at its March 18 meeting, according to interest-rate futures traded on the Chicago Board of Trade. There\'s an 8 percent chance the rate will fall to 1.75 percent by September. Consumer prices increased at an annual rate of 4.3 percent in the 12 months through January after a 4.1 percent gain in December, the Labor Department said in Washington today.

Core inflation, or prices excluding food and energy, will rise at a 2 percent to 2.2 percent pace this year, compared with 1.7 percent to 1.9 percent projected in October, the Fed said in quarterly forecasts released today as an addendum to minutes of its Jan. 29-30 meeting. Total consumer prices will rise by 2.1 percent to 2.4 percent.

Fed officials led by Chairman Ben S. Bernanke have cut borrowing costs five times since September in order to prevent $146 billion of losses on mortgage-related investments from tipping the economy into recession.

``We\'ve never faced this in terms of our modern financial system,\'\' said Gross, who is chief investment officer of Newport Beach, California-based Pimco. ``Those looking for quick overnight miracles are going to be disappointed.\'\'

To contact the reporters on this story: Thomas R. Keene in New York at [e-mail] ; Sandra Hernandez in New York at [e-mail]
Last Updated: February 20, 2008 16:27 EST