Tags: el-erian | bernanke | fed | activism

Pimco’s El-Erian: Bernanke Signals More Federal Reserve ‘Activism’

Friday, 31 August 2012 06:27 PM

The U.S. economy and markets can expect more Federal Reserve "activism" based on a speech delivered by Chairman Ben Bernanke at the Fed's Wyoming symposium, said Mohamed El-Erian, CEO of Pimco, manager of the world's largest bond fund.

In his widely anticipated speech, Bernanke said the Fed was ready to intervene with stimulus measures to spur more robust recovery but stopped short of specific plans to do so.

"The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant," Bernanke said in prepared remarks.

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

"Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market," Bernanke said.

"Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."

Analysis of the Fed chairman's words show the central bank will act, either with a new round of quantitative easing (QE), under which the Fed buys bonds held by banks, pumping the economy full of liquidity to drive down borrowing costs and spur investing, or by other measures, such as tweaking forecast language.

The Fed has rolled two rounds of quantitative easing (QE1 and QE2) since the financial meltdown in 2008, though tepid jobs reports and weak growth rates, among other indicators, have stoked market talk that a QE3 is on the way.

“First, Bernanke provided a very robust defense of what he’s done so far," El-Erian told CNBC. "Secondly, he told us problems were cyclical, not structural. And finally, he told us that costs are containable, they’re manageable. So, in my opinion, he is laying the ground for more activism from the Fed,” said El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co., also known as Pimco.

Mere talk of Fed easing can send the dollar tanking and stocks and gold soaring, and markets will pay attention to any signal that emerges from the Federal Reserve from now until its scheduled monetary policy meeting in mid-September.

Watch for clues signaling the Fed's willingness to intervene — which would threaten to push up inflation rates down the road — as well as its ability to intervene and the effectiveness of intervening, as past quantitative easing rounds have pushed interest rates so low that some economists have questioned whether further action would produce meaningful results.

Bond markets will provide clues.

“If you want to bet on the Fed, you’re looking at the short end of the Treasury curve. You’re looking at related high-quality corporates. You’re looking at mortgages and related sales of volatility," El-Erian said.

"You also should recognize that the market will protect itself from the inflation threat, so hard assets — especially gold — will benefit. If you want to go all the way to risk assets — equities and high-yield — remember that you are dependent on China and Europe when you go all the way out there.”

Other analysts agree that a third round of quantitative easing seems more likely now.

"Bernanke has taken a further step along the path to more policy stimulus, most likely a third round of asset purchases (QE3) to be announced at the mid-September FOMC meeting," said Paul Dales, senior U.S. economist at Capital Economics, according to the Associated Press.

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

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Friday, 31 August 2012 06:27 PM
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