Tags: El-Erian | Fed | inflation | fuel

Pimco’s El-Erian: Fed Wants to Fuel Inflation, Deal With it Later

Friday, 21 Sep 2012 10:13 AM

The Federal Reserve is slashing rates and pumping liquidity into the economy with such force that it actually wants to drive up inflation rates above target in order to lower unemployment rates, said Mohamed El-Erian, CEO of Pimco, manager of the world’s largest bond fund.

The Fed recently announced plans to buy $40 billion in mortgage-backed securities from banks a month until the economy improves and unemployment rates fall.

Such a move, known as quantitative easing but dubbed as printing money out of thin air by many, will carry on in an open-ended fashion, and works by pushing down interest rates across the economy, with side effects being a weaker dollar, rising stock prices and mounting inflationary pressures.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

“Not only will they tolerate higher inflation, not only will they wish for higher inflation, but they actually may target higher inflation,” El-Erian told CNBC.

The Fed’s sets monetary policy at a 2 percent inflation target, though open-ended quantitative easing could push rates above that level going forward, especially since the Fed has already jolted the economy with easing measures twice before since the 2008 financial crisis.

The first round of quantitative easing saw the Fed buy $1.7 trillion in mortgage-backed securities from banks, while the second round saw the U.S. central bank buy $600 billion in Treasury holdings from financial institutions.

Central banks elsewhere have rolled out similar measures, flooding the world with inflation-fueling liquidity.

“This is true for all central banks — the (European Central Bank), the Fed, the Bank of Japan, the Bank of England. We are so deep into unfamiliar territory, so deep into experimental mode, that we don’t know what the consequences will be,” El-Erian said.

“Whoever comes afterward will have to clean up the mess.”

The Fed adheres to a dual mandate of keeping inflation rates in target and employment at optimal levels, and many argue repeated rounds of quantitative easing indicate the Fed is prioritizing unemployment over price stability.

The unemployment rates stands at 8.1 percent, and one Fed official said interest rates should stay low until that figure drops to 5.5 percent.

The Federal Open Market Committee has said conditions meriting low benchmark interest rates should stick around through mid-2015.

“As long as the FOMC satisfies its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent,” said Minneapolis Fed President Narayana Kocherlakota, according to Reuters.

“The FOMC can provide more current stimulus if people believe that liftoff will be triggered by a lower unemployment rate.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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The Federal Reserve is slashing rates and pumping liquidity into the economy with such force that it actually wants to drive up inflation rates above target in order to lower unemployment rates, said Mohamed El-Erian, CEO of Pimco, manager of the world’s largest bond fund.
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2012-13-21
Friday, 21 Sep 2012 10:13 AM
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