Fed 'in a pickle,' Pimco's Gross says

WASHINGTON (MarketWatch) -- Falling home prices will dominate Federal Reserve policy for the next several years, despite "false hopes" of a bottom in housing, "faux economic strength" or worries about the dollar, says Bill Gross, managing director of Pacific Investment Management Co.

The Fed will probably cut the federal funds rate from 4.75% to 3.75% within the next six to 12 months, Gross wrote in his monthly outlook.
Newport Beach, Calif.-based Pimco is one of the largest managers of fixed-income assets in the world, with more than $650 billion in assets under management.



Click here to read Gross's Article:

Policymakers will have to adapt to a "brazen new world" dominated increasingly by supercharged private money that is unresponsive to public policy, Gross wrote. Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson will need to throw out the textbooks that describe a lost world in which banks, which dance to the Fed's tune, are the main force in the financial world, according to Gross.
"The modern financial complex has morphed into something unrecognizable to many astute market veterans and academics," Gross said, referring to a "shadow banking system" of derivatives and the alphabet soup of CDOs, CLOs, ABCPs, CPDOs and SIVs.