Pimco Chief Executive and Chief Investor Officer Mohamed El-Erian is joining the chorus of voices warning about the Federal Reserve’s recent announcement that interest rates would remain low until late 2014.
In a Financial Times blog entry, El-Erian writes, “I suspect the Fed recognises that the policies at its disposal are a long way from ideal.”
El-Erian observes that interest rates are floored at zero, while the Fed’s balance sheet is equal to a “previously unthinkable” 20 percent of the U.S. gross domestic product. He also highlights Operation Twist, the program of replacing holdings of shorter-maturity Treasuries with longer-dated ones.
“This unusual policy activism has helped prevent a damaging deflationary spiral,” El-Erian writes. “But it has not been sufficient to restore America on the path of sustainable growth and sufficient job creation, nor will it.”
El-Erian is right to be concerned that the Fed has “inadvertently provided cover for other government agencies” to avoid difficult decisions. Even the new Federal Reserve policy of greater transparency will do little to help when the government keeps its thumb on the lever for interest rates.