The Federal Reserve will have to cut its federal funds target rate to prevent a dramatic fall in housing prices, said the manager of the world's biggest bond fund today.
The turmoil in the risky subprime mortgage-market is a "$1 trillion problem", said Bill Gross, chief investment officer of Pacific Investment Management or Pimco.
"There are $1 trillion worth of subprimes and Alt-As and basically garbage loans."
Mr Gross said he expects $250 billion of subprime and Alt-A mortgage loans to default and that those defaults will fall to the balance sheets of investment stalwarts such as Merrill Lynch and Citigroup.
The problems in the mortgage market stem from interest rates "which are suddenly adjusting upwards for these subprimes and for these Alt-As," said Mr Gross, who noted these loans are adjustable-rate loans.
"We've only begun to see the pain from the standpoint of the homeowner in terms of those monthly payments. Defaults and delinquencies will increase as we extend throughout 2007 and then into 2008," he added.