Tags: el-erian | pimco | markets | central bank | fed | ecb | quantitative easing

El-Erian: Conflicting Central Bank Talk Roiling Stock Markets

Sunday, 15 Apr 2012 02:42 PM

Contradicting statements among monetary policy authorities in Europe and the U.S. are fueling recent stock-market volatility and could continue to do so in the near future, says Mohamed El-Erian, CEO of Pimco, the world's largest bond fund.

Some at the Federal Reserve and at the European Central Bank (ECB) have suggested the need to buy bonds from banks, which juices up the economy via liquidity injections that aim to fuel more job-creating recovery.

Others disagree with such policies, known technically as quantitative easing but dubbed by many as printing money out of thin air. Critics says easing measures fuel inflationary pressures down the road, adding it's time for economies to stand on their own.

The Fed and ECB have rolled out several rounds of quantitative easing since the downturn, which pumped up stock markets in the process, and investors are caught in a tug-of-war on statements and hints coming from the two camps.

"The renewed volatility in stocks was due to conflicting signs of additional central bank liquidity support, both in Europe and the U.S. By providing time (and hope) for economic and financial fundamentals to heal properly, such support is seen as critical to sustain the recent rally in risk assets," El-Erian writes in a CNBC opinion piece.

"Yet, in listening to different voices here and across the Atlantic, equity investors come to different conclusions as to whether additional liquidity will indeed be forthcoming. "

Monetary policy makers, meanwhile, will feel compelled to act to stimulate the economy when in reality, western governments need to do more.

In the U.S., for example, lawmakers argued up until the last day of a deadline to raise the U.S. debt ceiling and avoid default in 2011.

"All this speaks to the unsettling situation of markets that remain highly dependent on policymakers who, themselves, are stuck in the muddled middle: unable to deliver sustainable outcomes or to exit from their market interventions," El-Erian says.

"This is the unfortunate reality of an 'unusually uncertain' outlook, blunt policy tools, and a rather dysfunctional political context."

Other experts agree that speeches made by central bankers in public are sending markets on roller coaster rides these days.

"A new policy regime characterized by jawboning is now here," says Eric Green, economist at TD Securities, according to Reuters. "Policy is more constrained, and more accommodation increasingly problematic in scope and complexity."

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