The Federal Reserve will have to cut its federal funds target rate to prevent a dramatic fall in housing prices in the wake of the subprime mortgage meltdown, the manager of the world's biggest bond fund said on Monday.

The turmoil in the risky subprime mortgage-market is a $1 trillion problem ... There are $1 trillion worth of subprimes and Alt-As and basically garbage loans, said Bill Gross, chief investment officer of Pacific Investment Management Co. or Pimco, on CNBC Television.

Gross said he expects $250 billion of subprime and Alt-A mortgage loans to default and those defaults will fall to the balance sheets of investment stalwarts such as Merrill Lynch and Citigroup.

(Reporting by Jennifer Ablan and John Parry)