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Fed Likely to Push Zero-Rate to 2015, El-Erian Says: Tom Keene

There’s a “high probability” the Federal Reserve will say that it’s extending the duration of its zero-interest-rate policy into 2015, according to Pacific Investment Management Co.’s Mohamed El-Erian.

The central bank is likely to announce a third round of bond purchases, known as quantatitive easing, or QE3, at the conclusion of tomorrow’s policy meeting, according to almost two-thirds of economists in a Bloomberg survey. Two rounds of bond purchases totaling $2.3 trillion have failed to breathe life into the labor market, with unemployment stuck above 8 percent for 43 straight months, which Fed Chairman Ben S. Bernanke said last month is a “grave concern.”

“We suspect that the most likely outcome will be a change in the forward guidance language to go well into 2015,” El- Erian, the chief executive officer of the world’s largest manager of bond funds, said in a “Bloomberg Surveillance” radio interview with Tom Keene and Ken Prewitt. A “high possibility is you may get QE3, either now or by December.”

The U.S. central bank is unlikely to cut the interest rate it pays banks on reserves, intended to spur lending, or to target growth in gross domestic product, El-Erian said.

The Federal Open Market Committee plans to release a statement tomorrow at about 12:30 p.m. after a two-day meeting. At 2 p.m. the Fed will release policy makers’ forecasts for unemployment, inflation and the expected path of the federal funds rate over the next several years. Bernanke plans to hold a press conference at about 2:15 p.m.

Global Growth

While the Fed and the European Central Bank can help avoid or mitigate a crisis, or so-called tail risk, they can’t necessarily create a “better growth outcome,” El-Erian said. Last week, ECB President Mario Draghi said the central bank was ready to buy unlimited quantities of short-dated government bonds of nations signed up to rescues.

The global economy is forecast to expand 2.27 percent this year and 2.7 percent in 2013, compared with 2.87 percent in 2011, according to the median estimate of economists surveyed by Bloomberg.

For better growth “you need other policy makers to come in and so far other policy makers have not come in,” El-Erian said. “At the end, we need to do something with the functioning of our labor market.”

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; Tom Keene in New York at tkeene@bloomberg.net

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

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