El-Erian: Fed’s Easy Money Policy Is ‘All-In Bet’ – Moneynews

Tuesday, 08 Jul 2014 01:45 PM

By Dan Weil via Moneynews

The Federal Reserve’s continuation of a highly accommodative policy represents an “all-in bet” by Fed Chair Janet Yellen that the easing will bring economic growth before the policy reaches the point of causing financial instability, says former Pimco Co-CEO Mohamed El-Erian.

The Fed is expected to leave its federal funds rate target at a record low of zero to 0.25 percent until next year. And the central bank has indicated it will only gradually shrink its record balance sheet of $4.3 trillion.

“It’s a race between financial instability caused by too much money being pushed into the wrong places versus the economy healing,” El-Erian, chief economic advisor for Allianz, tells CNBC “For now, the market is very comforted by what Yellen is saying which is: ‘I’m willing to take the trade off.'”

Congress is incapable of action on the fiscal front to take the baton for the Fed, El-Erian argues.

“Congress is too dysfunctional right now” to implement policy that could boost economic growth, he adds.

“So the Fed keeps the game going, hoping you get enough healing. And that’s the big bet right now, that markets are ‘all-in’ as well.”

To be sure, in the wake of last week’s strong jobs data, some analysts, including those at Goldman Sachs, have advanced their call for when the Fed will begin raising rates. Goldman pushed up its prediction to the third quarter of 2015 from the first quarter of 2016.

The adjustment resulted from “the cumulative changes in the job market, inflation and financial conditions over the past few months,” the firm’s chief economist Jan Hatzius writes in a commentary obtained by MarketWatch.