Pimco's El-Erian: Fed May Be Giving Investors 'Too Much Guidance'

Wednesday, 26 Jun 2013 12:44 PM

By Dan Weil

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The Federal Reserve's increased transparency, such as indicating last week that it may taper quantitative easing (QE) soon, might have played a role in the plunge by financial markets afterward, says Pimco CEO Mohamed El-Erian.

Fed Chairman Ben Bernanke said last Wednesday that if the economy grows as the central bank expects, it may begin to pull back on its QE later this year.

The Standard & Poor's 500 Index then plummeted 5.5 percent from last Tuesday's close to this Monday's low before rebounding.

Editor's Note:
Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

The Fed's massive easing itself can hurt markets, El-Erian tells CNBC.

"The longer they stay unconventional, the deeper they venture with these experimental policies, the more the costs and the risks start to become large relative to the benefits," he notes.

But, "there's a second really interesting issue, which is, are they giving us too much guidance?"

The openness can accelerate market declines, El-Erian says.

Just look at the amount of information the Fed has given investors, he states, adding that the Fed has thrown out lots of numbers for when it will start tapering QE, such as a 7 percent unemployment rate, a 6.5 percent unemployment rate, a date this year and a date next year.

"When you give so much guidance to the market, you risk over-determining," El-Erian explains. "So what happens, people jump to the terminal values. They don't even wait for the journey. They go immediately to the destination and the re-price. Then the bad technicals kick in."

Even St. Louis Fed President James Bullard questioned whether Bernanke went too far in specifying the central bank's intentions.

Bullard said in a statement that he "felt that the committee's decision to authorize the chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed."

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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