Fed may shift talks toward more monetary stimulus, El-Erian says

Federal Reserve policy makers may shift discussion away from when to reduce monetary stimulus, given data showing the economy is weakening, according to Pacific Investment Management Co.’s Mohamed A. El-Erian.

“The inherent momentum of the economy is still weak and you don’t want to taper off too quickly,” El-Erian said, speaking in a Bloomberg Television interview with Willow Bay at the Milken Global Conference in Los Angeles. “They are going to try to change the narrative away from the Fed is taking its foot off the accelerator, to the Fed is maintaining its foot on the accelerator. It could even press it harder.”

The Fed is buying $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on borrowing costs. The central bank spent $2.3 trillion on Treasury and mortgage-related debt from 2008 to 2011 in the first two rounds of its policy known as quantitative easing.

Gross domestic product rose at a 2.5% annual rate in the first quarter, below the 3% median estimate of economists surveyed by Bloomberg, Commerce Department figures showed on April 26.

The policy-making Federal Open Market Committee, which concludes a two-day meeting May 1, is forecast to keep its interest-rate target at zero to 0.25% and continue its bond-buying.

Market Timing

At their meeting last month, several members of the Federal Open Market Committee advocated slowing purchases and stopping them by year-end. Since then, seven have voiced support for maintaining the current pace, including five who vote on the policy making panel: Governor Daniel Tarullo, New York Fed President William Dudley, James Bullard of St. Louis, Chicago’s Charles Evans and Boston’s Eric Rosengren.

El-Erian also noted the risks in the record amount of stimulus injected in the economy.

“The benefits of the Fed come with costs and risks,” he said. “What I worry about is when you run a system at artificial price levels, you start creating damage, resources are misallocated, too much risk is taken.”

Europe’s crisis remains a barrier to growth, El Erian said, noting efforts by the so-called troika -- the International Monetary Fund, the European Commission and the European Central Bank.

“The troika is having difficulty coordinating, there’s enormous creditor fatigue, there’s debtor fatigue and there are few growth models,” he said. “The economic situation continues to be worrisome. Europe needs to recognize that growth is the major issue and without growth everything else that they are doing is not going to pay off.”

Newport Beach, California-based Pimco’s Total Return Fund has returned 7.7% in the past year, beating 92% of its peers, according to data compiled by Bloomberg. It gained 1.3% during the past month, outperforming 79%.

Bloomberg News

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