Tags: El-Erian | Fed | taper | rate

Pimco's El-Erian Sees 50 Percent Chance of Fed Tapering Next Week

By    |   Tuesday, 10 December 2013 01:07 PM

The Federal Reserve will almost certainly announce a tapering of its quantitative easing by its March meeting, and there's a 50 percent chance it will act next week, says Pimco CEO Mohamed El-Erian.

The beginning of tapering will likely be coupled with a cut in the interest rate the Fed pays on banks' excess reserves and an emphasis by the Fed that its low-interest-rate policy will continue, he tells Bloomberg.

Banks currently earn 0.25 percent interest on the excess reserves they keep at the Fed. While a reduction wouldn't have a "dramatic impact," it would demonstrate the Fed's determination to keep rates low, El-Erian explains.

Editor’s Note: New Video: Obama Plans to Redistribute Seniors’ Wealth

Bank reserves have soared as the Fed has bought bonds from them. Banks now have more than $2 trillion in cash parked at the Fed, according to central bank data cited by Bloomberg.

The central bank has said it intends to keep the federal funds rate target at a record low of zero to 0.25 percent at least until unemployment falls to 6.5 percent and forecast inflation is not above 2.5 percent. The unemployment rate dropped to a five-year low of 7 percent in November.

"You're looking at a transition where the Fed will remain engaged but will alter its policy mix" by paring its bond buying while strengthening its message that short-term interest rates will stay low, El-Erian notes.

Pimco predicts U.S. economic growth will accelerate to 2.25 to 2.75 percent next year from 1.8 percent this year.

"The U.S. economy is healing," El-Erian says. "Household balance sheets are in a better place."

He is encouraged by the 203,000 gain in payrolls last month and the drop in unemployment. "The breadth of improvement was notable," El-Erian asserts.

The Fed's "hyperactive" monetary policy is giving the economy a chance to recover, he insists. GDP grew 3.6 percent in the third quarter.

But even next year's improvement won't provide the economy with "escape velocity." That's because business investment spending remains inadequate, he says.

"We have yet to see business investment really pick up," El-Erian explains. "Companies still prefer to use their excess cash for financial engineering," such as dividend increases and share buybacks.

As for tapering, 33 of 63 economist polled by Reuters Monday expect the Fed's first announcement of it to come in March, while 29 others anticipate the first announcement in December or January.

"The recent employment data do increase the likelihood that the Fed could taper its asset purchases in December, but we believe the committee will continue to view declines in the unemployment rate as overstating the amount of improvement in labor markets," Barclays Capital economists write in a report obtained by Reuters.

Editor’s Note: New Video: Obama Plans to Redistribute Seniors’ Wealth

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The Federal Reserve will almost certainly announce a tapering of its quantitative easing by its March meeting, and there's a 50 percent chance it will act next week, says Pimco CEO Mohamed El-Erian.
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2013-07-10
Tuesday, 10 December 2013 01:07 PM
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