Federal Reserve Treasury purchases will spur global inflation while failing to bring down U.S. unemployment, said Mohamed A. El-Erian, CEO at Pacific Investment Management Co.
Quantitative easing, the strategy of buying bonds to cut borrowing costs that is under consideration at the central bank, won’t be enough to deliver high economic growth, Mr. El-Erian said at a reception in New York sponsored by the Financial Women’s Association. The record amount of U.S. debt is another problem for the economy, said Mr. El-Erian, who is also co-chief investment officer at PIMCO, which runs the world’s biggest bond fund.
“QE on its own means we’ll have the same issues in six to nine months’ time with the rest of the world being inflated,” Mr. El-Erian said. “It will have some benefits but not as much as we’d like. It will have costs and unintended consequences.”
U.S. yields show investors increased bets on inflation to near the highest level since May. Kansas City Fed Bank President Thomas Hoenig said quantitative easing is a “dangerous gamble” that risks higher costs in the economy and another financial crisis. John Brynjolfsson, chief investment officer at Armored Wolf hedge fund, called Fed purchases a “bazooka.”
The difference between yields on 10-year notes and Treasury inflation-protected securities, a gauge of trader expectations for consumer prices, widened to 2.18 percentage points, matching the most since May 19.
The Treasury sold $10 billion of five-year TIPS at a negative yield for the first time at a U.S. debt auction Tuesday as investors bet the Fed will be successful in sparking inflation. The securities drew a yield of -0.55%.
“If I were to design the right policy response and implement it, it would be a package that would include structural reforms making us more competitive and the economy more flexible, more safety nets,” Mr. El-Erian said. “We need an economy that grows. I don’t like the notion of more debt to deal with an already high level of debt.”
President Barack Obama has increased the size of the government’s publicly traded obligations to an unprecedented $8.5 trillion as he tries to sustain the expansion. It hasn’t been enough to bring down unemployment, which has been more than 9% since May 2009.