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PIMCO’s El-Erian: What Bernanke Really Meant

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Federal Reserve Chairman Ben Bernanke traveled to Capitol Hill Thursday morning for another appearance before the Joint Economic Committee of Congress. While his comments were carefully crafted so as not to rattle the markets, PIMCO CEO Mohamed El-Erian took to the Huffington Post to deconstruct the true meaning behind the politico speak.

“[Bernanke] delivered a careful and balanced view of the economy (a gradual healing in the context of a still-muted outlook growth and jobs), re-iterated the improved banking and financial conditions at home (stressing the major additions to bank capital), and referred to the strains in Europe (acknowledging that they act as a drag on the US economy),” El-Erian wrote.

The most interesting aspect, El-Erian noted, related to policy, specifically:

1. “Certainly in his written submission, but also in the oral responses to questions, Bernanke is trying hard to shift the focus from monetary policy to other areas (particularly fiscal),” according to El-Erian. “This speaks to his lack of specificity on future monetary policy actions and to his comment that he would feel much more comfortable if Congress were to take some of the policy burden off the Fed.”

2. If this interpretation is correct, Bernanke is following the example of Mario Draghi, the president of the European Central Bank (ECB). “Draghi has been unusually vocal in recent weeks about the need for politicians in Europe to step up to the plate and deliver on their policy responsibilities; and he has been clear about the risk that relying just on the ECB may, in my words, again end up providing a bridge to nowhere.”

3. This is all consistent with the growing view in both academic and policy circles that unusual central bank activism is becoming less effective over all. Indeed, El-Erian said, Bernanke referred to this in the Q and A, and this relates to both lower expected benefits and the risk of greater collateral damage and unintended consequences.

4. “Central bankers are becoming more nuanced and thus differentiating between the trio of policy willingness, ability and effectiveness. They are telling us that they are willing to do more if conditions deteriorate; the ability is there though impacted by imperfect policy instruments; and effectiveness is not what it used to be.”

5. “There is a risk that central bankers may be ahead of some markets are at this stage,” El-Erian concludes. “And to reinforce this, just witness the reaction to the announcement out of China earlier today regarding monetary policy changes there.”

“With an understandable short-term mentality dominating—after all, so many macro factors are in flux these days (economic, financial and political) and thus an ‘unusually uncertain’ outlook—we should expect markets to continue to bundle what central bankers and others feel should be more differentiated,” he wrote. “The likely upshot is continued volatility underpinned by alternating periods of risk-on and risk-off.”


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