Some economists haves speculated that the Federal Reserve will embark upon another round of quantitative easing (QE3) after the end of its current round (QE2). That would be a mistake, says Pimco CEO Mohamed El-Erian.
Instead, the Fed should be plotting its exit from QE2, he tells CNBC.
"Think of your car having stalled and someone comes along with jumper cables and starts it. At some point, you have to take the cables off and see whether the car will drive," El-Erian says.
"The reality is if we go to QE3, we're going to find very quickly that the costs and risks of these unconventional policies are going to offset what the benefits are."
El-Erian sees merit in the idea of the Fed keeping its QE2 target to buy $600 billion of Treasurys but extending the purchases beyond the original June deadline to make sure the economy can stand on its own two feet before the Fed abandons its stimulus.
But that exit is exactly what the Fed should be planning, says the Pimco chief. "We can't forever continue with this stimulus.”
Still, “there is no rush to tighten” Jim O’Sullivan, chief economist at MF Global, tells Bloomberg. “Growth has improved, but we have a long way to go. (Fed Chairman Ben) Bernanke is emphasizing that a sustained labor-market recovery is not yet established.”
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