September 21, 2012

PIMCO’s El-Erian: Fed Wants Inflation Now, Will Clean Up ‘Mess’ Later

Bond chief piles on with more central bank criticism after QE3 announcement

PIMCO's Mohamed El-ErianPIMCO CEO Mohamed El-Erian harshly criticized the Federal Reserve and chairman Ben Bernanke on Friday, saying not only are they willing to tolerate inflation but actually are trying to create it, with a “mess” left behind for their successors to clean up.

El-Erian (left) told CNBC the reason is that “the risks outweigh the rewards as the central bank tries to stimulate an economy that still is foundering three years after the financial crisis recession ostensibly ended.”

As the network notes, El-Erian has previously called the policy a "reverse Volcker moment," in reference to former Fed Chairman Paul Volcker, who raised rates and deliberately put the nation into recession in the early 1980s to control runaway inflation.

"Not only will they tolerate higher inflation, not only will they wish for higher inflation, but they actually may target higher inflation," El-Erian said during a "Squawk Box" interview.

The interview is a response to last week’s announcement that the Fed was embarking on a third round of quantitative easing that will continue until the economy reaches an unspecified target in the jobless rate. The announcement provoked a firestorm of response in many financial services circles.  

Bill Gross, El-Erian’s boss at PIMCO, joined his colleague by posting a critical tweet Monday night.

"Central banks are where bad bonds go to die. Sell bad bonds, buy good ones. Investing sometimes can be very simple," Gross tweeted.

"My worst fear is that fiscal gridlock continues, coupled with the policies of this activist Fed chairman,” legendary money manager Bob Rodriguez, managing partner and CEO of First Pacific Advisors, LLC, also known as FPA, added on Thursday. “Today’s Fed actions add to my anxieties. ‘All in’ may be a good strategy for poker but not for this economy."

But Bernanke and the Fed have their defenders, even if they come from within. Dallas regional Fed president Richard Fisher says Congress, and not Ben Bernanke, is to blame for U.S. fiscal woes.

Fisher, known for his blunt and often revealing comments that lift the veil on the once-secretive Fed, told CNBC on Tuesday that the Federal Reserve has done its part to jumpstart the U.S. economy but a lack of action by Congress has prevented a recovery.

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