Pimco CEO El-Erian: US 'Continues to Heal' but Problems Persisting

Tuesday, 16 Jul 2013 11:29 AM

By Glenn J. Kalinoski

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The triple threat of government debt, high unemployment and sluggish economic growth continues to plague the U.S., according to Pimco CEO and co-CIO Mohamed El-Erian.

"We continue to heal, but we're not at escape velocity," El-Erian told CNBC.

"We're tracking at 1.2 percent for the second quarter with 80 percent of the data in. So we're going to have to pick up next quarter and the one after to get to 2 percent."

Story continues below video.



Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

E-Erian was asked about what he expects from Federal Reserve Chairman Ben Bernanke during his testimony before the House Financial Services Committee on Wednesday. Bernanke will testify before the Senate Banking Committee the following day. El-Erian's answer: a high-wire act without the excitement.

"He will try not to rock the boat, especially so, given … the underlying economy is tracking about 1.2 percent growth," El-Erian said. "He doesn't want the economy excited."

A selloff was recently unleashed in global financial markets when Bernanke warned that the Fed's bond buying would likely be scaled back this year.

In late May, Bernanke told Congress a decision to scale back the Fed's $85 billion per month stimulus could be taken at one of its "next few meetings," Reuters reported.

Bernanke again said last month the U.S. central bank may start to slow its monthly bond purchases this year and end them in 2014 if economic growth meets policymakers’ goals.

The Fed also repeated in June that it will not lift interest rates until unemployment hits 6.5 percent or lower, provided that the outlook for inflation stays under 2.5 percent.  The jobless rate was 7.6 percent in June.

After the June remarks by the Fed and Bernanke, a yield of 1.62 percent on the benchmark 10-year Treasury note in early May turned into a 2.75 percent yield by the beginning of last week, the swiftest rise in yields in a decade, though the market has since stabilized and the yield was back down to 2.54 percent late on Monday, Reuters reported.

Global stock markets also plunged initially but have since recovered.

Meanwhile, Bernanke last week said that the U.S. needs “highly accommodative monetary policy for the foreseeable future,” according to Bloomberg News. Markets soared in reaction.

"Markets seem more able right now to accept the Fed tapering without pricing in ever higher interest rates in response," Dean Maki, chief U.S. economist at Barclays Capital in New York, told Reuters.

El-Erian said that the Fed wants to taper for two reasons. "One, they have a more optimistic view of the economy. That's good," he said. "Two, is they're worried about the costs and risks, or collateral damage and the unintended consequences. So there are two things that they're trying to fulfill with one instrument," he said, "and that's why the market becomes so volatile."

Meanwhile, El-Erian was asked to predict future movements in the 10-year note. "Short term, we think yields are more likely to come down for the 10-year, prices go up from here," El-Erian said. "Longer term, three to five years, we are in a rising environment."

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

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