Pimco’s El-Erian Says Bank Tests a Good Signal for Economy

Pacific Investment Management Co.’s Mohamed El-Erian said the Federal Reserve’s stress tests on financial institutions were a good sign for an economy that may still receive another round of asset purchases from the bank.

“They were credible and unambiguously this is good news,” El-Erian, the chief executive officer of the world’s largest manager of bond funds, said of the bank tests during an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “The big hope for everybody is that they’ll start lending into the real economy.”

The U.S. central bank yesterday said 15 of 19 banks would be able to maintain capital levels above a regulatory minimum in an “extremely adverse” economic scenario, even while continuing to pay dividends and repurchasing stock. Those results were due to scrutiny by the Fed on capital payouts over the past three years, the central bank said.

JPMorgan Chase & Co. and Wells Fargo & Co. (WFC) joined banks raising dividends and authorizing share repurchases after passing the stress tests. Citigroup Inc., the lender that took the most government aid during the financial crisis, said it will resubmit its capital plan to regulators after failing to meet some minimum standards in the tests. Citigroup has repaid $45 billion in Troubled Asset Relief Program money.

‘Taking More Risk’

“The first step is wanting to give money back to shareholders -- that’s the easy step for them,” said El-Erian of Newport Beach, California-based Pimco. “The harder step is to start taking more risk and lending to the economy. That is the most critical thing because we need this recovery to continue to build steam. It hasn’t yet gone from being fueled by liquidity to being fueled by fundamentals.”

The central bank has pledged to keep the benchmark interest rate at almost zero through at least late 2014 and has purchased $2.3 trillion of securities under two rounds of assets purchases known as quantitative easing, or QE, from December 2008 to June 2011.

“Our own view is that QE3 will probably materialize down the road simply because the endogenous engines of growth, while they are picking up, are not strong enough yet given all the headwinds faced that face the U.S. economy,” El-Erian said.

At the same time, investors are growing concerned that central bank policy will cause the Fed to lose control of inflation, he said.

‘Getting Nervous’

The difference in yield between Treasury Inflation Protected Securities and nominal bonds, known as the break-even rate, indicated that investors expect consumer prices to rise 2.2 percent annually over the next five years, the highest since May. The average over the past year is 1.88 percent.

“The markets are getting nervous,” El-Erian said. “They’re saying, why is the Fed continuing with this pedal-to- the-metal approach?”

The labor market has “improved further; the unemployment rate has declined notably in recent months but remains elevated,” the policy-setting Federal Open Market Committee said yesterday in a statement at the conclusion of a meeting yesterday in Washington. While global financial-market strains have eased, it said, they continue to “pose significant downside risks to the economic outlook.”

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; Betty Liu in New York at bliu17@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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