El-Erian Say Fed ‘Forced’ Central Banks to Ease Policy
The Federal Reserve’s record monetary stimulus has compelled central banks from Mexico to Japan to follow suit, said Pacific Investment Management Co.’s Mohamed El-Erian.
The Fed’s “artificially low” benchmark interest rate has put upward pressure on several currencies, threatening to erode the competitiveness of those nations’ economies, El-Erian, chief executive officer of the world’s largest manager of bond funds, said in a speech today in Stanford, California. “Ultimately, they are forced -- Mexico has been forced, Brazil has been forced, Korea has been forced, Japan has been forced -- into doing exactly the same thing” as the Fed.
Mexico’s central bank unexpectedly cut its benchmark interest rate last week for the first time since 2009, while Haruhiko Kuroda, who was confirmed today as Bank of Japan (8301) governor, has pledged to do more to beat deflation.
“Central banks are carrying the majority of the policy burden, not by choice but by perceived necessity,” El-Erian said at a conference held at Stanford University.
Fed officials have defended their record easing to global policy makers as emerging markets tackled an influx of capital that has pushed up their currencies. Vice Chairman Janet Yellen said in October that other countries have the tools to manage excess capital flows.
The U.S. central bank has kept its main interest rate near zero since December 2008 and is engaged in a third round of bond purchases to spur economic growth and reduce 7.7 percent unemployment. As a result, the Fed has become the equity investors’ “best friend” and a “price-setter” in financial markets, El-Erian said.
Chairman Ben S. Bernanke “pivoted” in 2010 and started using “imperfect tools,” leaving the balance of benefits and costs unclear, El-Erian said.
“It’s the equivalent of a pharmaceutical company that has no choice but to put medication on the market even though the medication’s hasn’t been clinically tested,” he said. “That is why the Fed talks a lot about the costs” of its quantitative easing program, he said.
The Standard & Poor’s 500 Index climbed yesterday to within two points of its record closing level of 1,565.15 set in October 2007. The gauge has more than doubled from its bottom in 2009, fueled by corporate earnings that topped estimates and monetary stimulus from the Fed. The Dow Jones Industrial Average set an all-time high for the eighth day in a row yesterday.
Stocks (SPX) fell today as a report showed U.S. consumer confidence unexpectedly weakened in March. The S&P 500 declined 0.3 percent to 1,558.85 at 3:30 p.m. in New York, and the Dow was also down 0.3 percent to 14,489.57.
Fed officials are debating the potential costs of the easing. Governor Jeremy Stein last month said that some credit markets, including leveraged loans and junk bonds, show signs of potentially excessive risk-taking. Kansas City Fed President Esther George has warned of risks from farm land prices at “historically high levels.”
While the costs of the Fed’s $85 billion in monthly bond purchases are currently “very isolated” and financial markets are in a “sweet spot,” El-Erian said the longer-term outlook is “unusually uncertain” with a “major, major fork” awaiting investors, he said.
Either the economy will successfully make a transition from a state of “assisted growth” to “genuine growth,” or the expansion will fall short of reaching “escape velocity” as Fed officials discover the benefits of their stimulus no longer outweigh the costs, he said.
“In order to deliver a competitive country that can grow sustainably, in order to catch up with what we have left behind since the crisis, we need to deal with structural impediments,” El-Erian said. While only the government has the power to fix those longer-term issues, the Fed can buy time “for the system so that others can get their act together,” he said.
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