El-Erian to WSJ: Central Banks Create 'Artificial' Asset Prices

Tuesday, 16 Apr 2013 05:56 PM

By Dan Weil

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The Federal Reserve and the world's other central banks — not fundamentals — are boosting asset prices, says Mohamed El-Erian, CEO of giant money manager Pimco.

“Investors should recognize that in virtually every single market segment, we are trading at very artificial levels,” El-Erian told WSJ.com. “It’s true for bonds, it’s true for equities. . . . If these levels aren’t validated by the fundamentals, then investors will get hurt.” 

In the United States, the stock market hit record highs again last week, and bond yields are near record lows.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

The Fed has added more than $2 trillion to its balance sheet through quantitative easing (QE) over the past five years. And it plans to keep the federal funds rate target at zero to 0.25 percent until unemployment shrinks to 6.5 percent from 7.6 percent in March. Other central banks also are in stimulative mode, with the latest entrant the Bank of Japan.

Some economists worry that the Fed will withdraw its easing too quickly. But El-Erian is concerned about the opposite problem. 

“We think they will most likely stay too long, and they will consciously make that mistake,” he said. “In order for central banks to achieve their ultimate economic objective — which is growth and jobs, they have to push investors into taking more risk than is justified.” 

The Federal Reserve’s minutes from its March 19-20 meeting, released last week, show policymakers are divided over how to approach QE now. 

“Many participants” maintained that the job market outlook has improved, which argues for slowing QE “at some point over the next several meetings,” according to the minutes. But a few policymakers want to end QE soon, and a few others want to consider reducing it soon.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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