Lord Abbett says Fed won't rush a rate cut

By Ros Krasny

NEW YORK (Reuters) - The Federal Reserve will guard its monetary policy ammunition and not rush to lower interest rates in 2007, Bob Morris, chief investment officer at Lord Abbett & Co. LLC, said on Wednesday.

Morris joined a chorus of top money managers at the Reuters Investment Summit going against the market's collective wisdom that Fed rate cuts are on tap for the first half of 2007.

After pushing rates down to 1 percent in 2003, "the Fed has had this window, this wonderful opportunity to get rates back up ... I think they're going to grudgingly give away that fire power," Morris said.

"The best guess is the Fed will do nothing" in 2007, he said. "In 2008 the Fed could be in a position to bring fed funds down a little bit."

The long-running conundrum of low long-term bond yields continues, and "gurus" expecting the inverted yield curve to normalize with lower short-term yields might be wrong, Morris said.

The way the conundrum is resolved will be "the story" for financial markets in 2007, he said.

In contrast to prevailing worries about inflation, Morris warned that the current economic cycle could end with a new deflation problem.

"We've built a tremendous amount of capacity ... throughout the developing world," he noted. "I don't think inflation is the real problem."

Morris said the year-long stretch in 2003 and 2004 when fed funds were held at 1 percent put the United States on the edge of an abyss that the Fed will not want to revisit.

Among other things "today's real estate imbalances are directly related to the fact that rates were held too low for too long," Morris said. "The real estate pig is about halfway through the snake" at this point, he added.

U.S. GDP could grow at a below-trend rate of 2 to 2.5 percent in 2007, according to Morris.

"Even if the economy is a little weaker than forecast, the Fed always worries about its tool-kit. When the fed funds rate was down to 1 percent they had no bullets left."

Morris said he had high confidence in the skills of Chairman Ben Bernanke to guide Fed policy.

"He is a cautious man; I think he understands the implication of policy. Alan Greenspan was something of a riverboat gambler," said Morris. "I think (Bernanke) will move judiciously. There's very little entertainment value in the man, and a lot more substance."