The co-head of the world's largest bond fund company said U.S. policy makers and the Fed are challenged in a number of key economic areas in avoiding recession.NEW YORK (Reuters)
- Bond fund leader Pimco's Mohamed El-Erian on Wednesday said the
Federal Reserve does not have the tools to deal with the U.S. housing
crisis and rapidly rising consumer prices, leaving it to lawmakers to
avert a severe recession.
The co-head of the world's largest bond fund company said U.S.
policy makers "do not have good policy tools to deal with the
destabilizing combination of asset price deflation, and goods
inflation."
El-Erian also added that the Fed is "particularly challenged" on
account of its dual mandate that calls for maintaining solid employment
and low inflation.
"This comes at a time when regulators are trying to play catch up
with a financial system that has morphed into something that does not
fit neatly into existing frameworks and mindsets," El-Erian wrote to
clients after Pimco's quarterly economic forum at its Newport Beach,
California headquarters.
"The longer the delay out of Washington D.C. in implementing fiscal
measures to stabilize the housing sector, the greater the risk that the
higher collateral damage on Main Street will induce a
politically-driven regulatory over-reaction with unpredictable economic
outcomes," he added.
El-Erian, who helps oversee $750 billion in assets, also said the
Fed's move to let securities firm borrow directly through its discount
window will likely evolve into a permanent facility.
Investment banks, forced to unwind years of huge leverage, will seek
ways to secure a deposit base that can reduce their cost of funding,
including through merger and acquisition, El-Erian added. "This process
of deleveraging and, if done properly, de-risking will have a number of
implications for investors," El-Erian said.
"And by creating an initial vacuum in the more highly leveraged
space vacated by investment banks, it will entice new entrants, some of
which will come from the current generation of private equity and hedge
funds."
Pimco's forum included its economic consultant former Fed chairman Alan Greenspan as a participant.
(Reporting by Jennifer Ablan and John Parry; Editing by Richard Satran)
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