PIMCO’s El-Erian: Forget Politicians—It’s the Fed That Matters

PIMCO CEO Mohamed El-Erian said Monday that although the G-8 Summit would bring powerful world leaders this week to Northern Ireland, all eyes in market and economic circles would be on the Federal Reserve’s meeting Tuesday and Wednesday because central banks are better these days at setting policy than politicians.

“When it comes to economic issues, this Summit will again be big on proclamation but risks being largely ineffectual when it comes to immediate measures that make a difference on the ground,” wrote El-Erian (left) in a comment published by Fortune at CNNMoney.com. “Not so for the Federal Reserve, where even a bland outcome can make a difference.”

The Fed and other Western central banks have been at the forefront of efforts to revive economic growth, create jobs and maintain financial stability, according to El-Erian, who serves as PIMCO’s co-chief investment officer alongside Bill Gross.

“Lacking the support of other policymaking entities, they have courageously taken on important policy objectives with imperfect and highly experimental tools,” El-Erian wrote. “As such, there is genuine uncertainty today about the future evolution of the cost-benefit equation, and what this means both for the willingness of central bankers to stay the course and for their current and future effectiveness.”

Nervousness About Rising Interest Rates

El-Erian’s comments come as interest rates have recently started to rise—even though inflation is in check and the U.S. unemployment rate stubbornly remains above 7%. Yet the benchmark 10-year U.S. Treasury note rose to as high as 2.29% last week (its highest level since April 2012), and mortgage rates look to be rising toward the 4% mark.

Why? Because investors are nervous, and they keep waiting for central banks such as the Fed to turn off the easy-money spigot. As a result, investors are reducing their exposure to bonds and sending rates higher, which has the effect of pushing bond prices down.

“The ongoing bond sell-off has offered investors few places to hide,” wrote Anthony Valeri, fixed-income market strategist for LPL Financial, in a fixed income call note on June 11. “Most bond sectors have suffered price declines, in some cases worse than Treasuries, in what has been a general rebuke of bonds in response to uncertainty about the timing of Fed tapering.”

Buzzword du Jour: ‘Tapering’