NEW YORK (Reuters)- Bond fund leader Pimco’s Mohamed El-Erian on Wednesday said theFederal Reserve does not have the tools to deal with the U.S. housingcrisis and rapidly rising consumer prices, leaving it to lawmakers toavert 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 thedestabilizing combination of asset price deflation, and goodsinflation."
El-Erian also added that the Fed is "particularly challenged" onaccount of its dual mandate that calls for maintaining solid employmentand low inflation.
"This comes at a time when regulators are trying to play catch upwith a financial system that has morphed into something that does notfit neatly into existing frameworks and mindsets," El-Erian wrote toclients after Pimco’s quarterly economic forum at its Newport Beach,California headquarters.
"The longer the delay out of Washington D.C. in implementing fiscalmeasures to stabilize the housing sector, the greater the risk that thehigher collateral damage on Main Street will induce apolitically-driven regulatory over-reaction with unpredictable economicoutcomes," he added.
El-Erian, who helps oversee $750 billion in assets, also said theFed’s move to let securities firm borrow directly through its discountwindow will likely evolve into a permanent facility.
Investment banks, forced to unwind years of huge leverage, will seekways to secure a deposit base that can reduce their cost of funding,including through merger and acquisition, El-Erian added. "This processof deleveraging and, if done properly, de-risking will have a number ofimplications for investors," El-Erian said.
"And by creating an initial vacuum in the more highly leveragedspace vacated by investment banks, it will entice new entrants, some ofwhich will come from the current generation of private equity and hedgefunds."
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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