El-Erian Says Market Will Focus on Fed’s Economic Assessment

Financial-market participants will focus on any changes in the Federal Reserve’s assessment of the economy when policy makers conclude today’s meeting, according to Pacific Investment Management Co.’s Mohamed El-Erian.

“What the market will be looking very carefully at is its updated assessment by the Fed on the economy,” El-Erian, chief executive and co-chief investment officer at the world’s biggest manager of bond funds, said in an interview on Bloomberg Television with Scarlet Fu and Michael McKee. “In particular, to get some handle on the impact on the congressional dysfunction and what that means for their growth projections.”

The Federal Open Market Committee, following the completion of a two-day policy meeting in Washington, releases its statement at 2 p.m. The panel won’t update economic forecasts, and Chairman Ben S. Bernanke won’t hold a news conference. The Fed will probably maintain its $85 billion in monthly bond purchases at a meeting, according to a Bloomberg survey of economists.

Policy makers and investors are trying to gauge the strength of the U.S. expansion after this month’s 16-day partial government shutdown. U.S. payrolls rose by 148,000 in September, versus the median forecast for an 180,000 gain by 93 economists in a Bloomberg News survey. The data indicated the economy lost momentum leading up to the shutdown, which Standard & Poor’s estimates shaved at least 0.6 percent off fourth-quarter growth.

Taper Speculation

There will be “no change in rates, no change in the asset purchase and no major change in forward guidance,” El-Erian said. “In the short term, the market thinks that no news is good news.”

The FOMC on Sept. 18 surprised investors after a two-day meeting by refraining from reducing its bond purchases. Economists predicted before the gathering that the committee would dial down monthly Treasury purchases by $5 billion while maintaining buying of mortgage-backed securities, according to a Bloomberg News survey.

The fiscal deadlock and suspension of economic reports mean the Fed probably won’t start reducing bond purchases until next year, according to a separate Bloomberg News survey.

The world’s largest economy expanded at a 2.5 percent annualized pace in the second quarter, beating economist estimates, after growing at a 1.1 percent pace in the first quarter.

“We think over the next 12 months it is a new normal economy” El-Erian said from New York. “Which means sluggish growth, persistently high unemployment and unfortunately that is our reality.

“The Fed is not going to be hiking rates anytime soon,” El-Erian said, referring to the central bank’s zero to 0.25 percent target band for the rate of overnight loans between banks. “If you look at the markets’ expectations of hikes priced in, we think it’s too early. We think the Fed is actually going to have to stay very low for much longer, which means there is a lot more value in front end of yield curves than what most people anticipate at this point.”

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