Pimco's El-Erian Says Fed Easing to Spur Inflation

SFGATE.com

Oct. 25 (Bloomberg) -- Federal Reserve Treasury purchases will lead to faster global inflation while failing to revive U.S. economic growth, said Mohamed A. El-Erian, chief executive officer of Pacific Investment Management Co.

Quantitative easing, the strategy of buying bonds to keep borrowing costs low that is under consideration at the central bank, won't be enough to curb U.S. unemployment, El-Erian said at a reception in New York sponsored by the Financial Women's Association. The Fed will buy more bonds because it is terrified of deflation, an extended decline in consumer prices, he said.

"QE on its own means we'll have the same issues in six to nine months time with the rest of the world being inflated," El-Erian said. "It will have some benefits but not as much as we'd like. It will have costs and unintended consequences."

The Fed purchased $300 billion of Treasuries in 2009 under quantitative easing and traders are preparing for another round of buying that they've dubbed QE2.

Fresh purchases will drive up commodity prices as much of the money injected into the U.S. economy leaks out to other currencies, El-Erian said.

El-Erian has popularized the phrase "new normal" to describe how growth will be depressed by consumer retrenchment and tighter financial regulation. Pimco, based in Newport Beach, California, runs the world's biggest bond fund.

He also has said governments and central banks haven't detected the "ongoing paradigm shift" in their economies that will require remedies beyond stimulus programs. Among the fault lines he spots are strained balanced sheets, persistently high unemployment and a misunderstanding of financial markets.

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