Tags: Pimco | El-Erian | Fed | Easing | Spur | Inflation

Pimco’s El-Erian: Fed Easing to Spur Inflation

Tuesday, 26 Oct 2010 08:10 AM

Federal Reserve Treasury purchases will lead to faster global inflation while failing to revive U.S. economic growth, said Mohamed A. El-Erian, chief executive officer of Pacific Investment Management Co.

Quantitative easing, the strategy of buying bonds to keep borrowing costs low that is under consideration at the central bank, won’t be enough to curb U.S. unemployment, El-Erian said at a reception in New York sponsored by the Financial Women’s Association. The Fed will buy more bonds because it is terrified of deflation, an extended decline in consumer prices, he said.

“QE on its own means we’ll have the same issues in six to nine months time with the rest of the world being inflated,” El-Erian said. “It will have some benefits but not as much as we’d like. It will have costs and unintended consequences.”

The Fed purchased $300 billion of Treasuries in 2009 under quantitative easing and traders are preparing for another round of buying that they’ve dubbed QE2.

Fresh purchases will drive up commodity prices as much of the money injected into the U.S. economy leaks out to other currencies, El-Erian said.

El-Erian has popularized the phrase “new normal” to describe how growth will be depressed by consumer retrenchment and tighter financial regulation. Pimco, based in Newport Beach, California, runs the world’s biggest bond fund.

He also has said governments and central banks haven’t detected the “ongoing paradigm shift” in their economies that will require remedies beyond stimulus programs. Among the fault lines he spots are strained balanced sheets, persistently high unemployment and a misunderstanding of financial markets.

‘Terrifying’ Unemployment

“We have a structural unemployment issue,” El-Erian said in New York. “It is worrisome because it erodes the skillset of a society. The numbers are terrifying. The longer you are unemployed, the more difficult it is to get a job.”

American private firms added 64,000 jobs in September, less than forecast, and the jobless rate held at 9.6 percent, the Labor Department said Oct. 8.

Employers eliminated 95,000 jobs after a revised decrease of 57,000 in August, according to Labor Department figures in Washington. The median estimate of economists surveyed by Bloomberg News called for a 5,000-position drop.

Inflation, China

Pimco earlier today said that quantitative easing from the developed world may boost investment in the faster-growing emerging nations of Asia, including China, potentially fueling inflation.

China is heading for a more moderate, sustainable pace of economic growth, said Chia-Liang Lian, a Singapore-based fund manager at Pimco, in a discussion posted on the company’s website.

Pimco’s $252 billion Total Return Fund reduced its investment in U.S. government and related debt to 33 percent of assets in September from 36 percent in August, according to the Newport Beach, California-based company’s website. The fund boosted mortgages to 28 percent of assets, from 21 percent. Pimco doesn’t comment directly on monthly changes in portfolio holdings. Pimco, a unit of Munich-based insurer Allianz SE, managed $1.1 trillion of assets as of June 30.

The firm on Oct. 14 said that it sold Treasuries on expectations a second round of debt purchases by the Federal Reserve will have limited impact.

Bill Gross, Pimco’s co-founder and manager of the world’s biggest mutual fund, the Total Return Fund, said Oct. 8 on Bloomberg Television that the central bank may buy about $100 billion in government debt a month, or $1.2 trillion over the next year, in a new round of quantitative easing.

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