Ben S. Bernanke probably won’t provide specific plans for further monetary action at the Federal Reserve Bank of Kansas City’s annual Jackson Hole symposium this week, according to Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian.
The Fed signaled last week it’s ready to take further steps to spur the economic recovery. Many policy makers said additional stimulus probably will be needed soon unless the economy shows signs of a durable pickup, according to minutes released Aug. 22 of the central bank’s most recent meeting, on July 31-Aug. 1. Fed Chairman Bernanke is scheduled to speak on Aug. 31 at the economic-policy conference in Wyoming.
“The minutes were consequential and we don’t expect Bernanke to take it further than what the minutes said,” El-Erian, also the co-chief investment officer of the world’s largest manager of bond funds, said on Bloomberg Television’s “In the Loop” with Betty Liu. “It’s highly probable that he will outline the options that the Fed has available and the commitment to do more if needed.”
The central bank bought $2.3 trillion of debt from 2008 to 2011 in two rounds of what’s become known as quantitative easing, or QE. It has also kept its benchmark interest rate at zero to 0.25 percent since December 2008 and has pledged to hold it there until at least 2014.
Bernanke said in a letter dated Aug. 22 to Representative Darrell Issa, a California Republican who chairs the House Oversight and Government Reform Committee, that the Fed has the ability to take additional steps to boost the economy.
More “stimulus would have more some impact, especially if the Fed focuses on buying mortgage securities,” El-Erian said from Pimco’s headquarters in Newport Beach, California. And the Fed’s easing has allowed borrowing costs to remain “artificially low,” thus stimulating the economy, he said.
Monetary policy is exhibiting diminishing returns and has the potential for causing “collateral damage” for money market funds, pension funds, the insurance industry and “the functioning of markets” El-Erian said. “The equation between costs and risks are becoming less favorable and that’s an issue for the Fed.”
Mortgages, at 51 percent in July, are the largest holdings in the flagship Total Return Fund managed by Pimco founder Bill Gross, who serves as co-chief investment officer with El-Erian.
Treasury yields remain close to the lowest ever amid a slowing economy, global financial turmoil and U.S. unemployment above 8 percent for more than three years. The year-end “fiscal cliff” of higher U.S. taxes and reductions in spending on defense and other government programs that will take effect unless Congress acts also clouds the economic outlook, he said.
“What we’ve learned over the last couple of years is politics matter,” El-Erian said. “We need clarity on the macro side, and you need people to worry less about the functioning of markets.”
The $270 billion Total Return Fund gained 8.61 percent during the past year, beating 92 percent of its peers, according to data compiled by Bloomberg. The fund gained 0.56 percent in the past month, beating 90 percent of its peers.