El-Erian Says Fed-Induced Market Volatility Is Bad for Economy

The Federal Reserve’s failure to provide better guidance on the unwinding of monetary stimulus has stoked volatility in debt markets that risks weakening the U.S. economy, according to Pimco’s Mohamed El-Erian.

“The Fed surprised the markets and now they are surprised by how the markets have reacted,” El-Erian, chief executive and co-chief investment officer at Pacific Investment Management Co., said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “And now we are told it was borderline and now we are told maybe as early as October and we may have a press conference. The result is the markets go on this roller coaster and this volatility is not good for the economy.”

The Fed unexpectedly refrained from reducing the $85 billion pace of monthly bond buying at its policy meeting this week, saying it needs more evidence of lasting improvement in the economy and warning that an increase in interest rates threatened to curb the expansion. The central bank, in a statement, left unchanged its outlook that its target interest rate will remain near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent.

The yield on the benchmark 10-year note fell 16 basis points, or 0.16 percentage point, to 2.69 percent, after the announce of the Fed’s decision on Sept. 18. The drop in yields was the biggest in almost two years. The yield was little changed today at 2.75 percent.

‘Borderline Decision’

Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year who has backed record stimulus, said today in a separate Bloomberg Television interview that a small tapering of bond buying is possible next month after the Fed made a close call this week in deciding not to slow purchases.

“That was a borderline decision” after “weaker data came in,” Bullard said today on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene. “The committee came down on the side of, ‘Let’s wait.’”

Markets shouldn’t have been surprised by the decision because Federal Open Market Committee members have repeatedly said the decision to slow, or taper, would be “data dependent,” Bullard said.

Investors see a 43 percent chance that policy makers will increase the federal funds rate target to 0.5 percent or more by January 2015, based on data compiled by Bloomberg from futures contracts. The odds were 68 percent two weeks ago.

“There is lots of uncertainly,” said El-Erian, head of the world’s biggest manager of bond funds. At the Fed, “you are having difficult decision making with a lot of uncertainty with a change of leadership. It’s not just the chair, it is going to be members of the FOMC” that will change next year.

Lawrence Summers withdrew from consideration this week to replace Chairman Ben S. Bernanke. Summers’s decision made Fed Vice Chairman Janet Yellen the top candidate, a sign to Pimco that the central bank will maintain its easy-money policies, El-Erian said.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

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

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