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Fed Needs to Start Backing Off: El-Erian

CNBC.com
Thursday, 25 Jun 2009 | 9:38 AM ET

The Federal Reserve has done its job and now needs to let fiscal policymakers take over, Pimco bond fund co-CEO Mohamed El-Erian told CNBC.

Comparing the U.S. economy to a car, El-Erian said the Fed needs to let somebody else do the driving.

El-Erian on the Markets
Mohamed El-Erian, CEO and co-CIO at Pimco, shares his market insight.

"My sense is the Fed wants to be in the passenger seat now and leave Treasury behind the wheel," he said in a live interview. "I suspect that what they really want to do is not do very much, just leave the option out, keep interest rates low and observe, because the balance is harder now."

Had he been in charge, El-Erian said he would have taken this week's Fed Open Market Committee meeting as an opportunity to outline an exit strategy from the multiple measures it has taken to improve liquidity and keep mortgage rates low. Pimco operates the world's largest bond fund.

But he didn't fault the central bank, saying it has to be careful how it pulls away from such an active role in the financial markets.

"You don't want the Fed to be a direct player in so many markets, because by definition their incentives are noncommercial," El-Erian said. "So it's in the interest of the market to have the Fed gradually—and the critical word is 'gradually'—step back to the sideline and act as a referee, not as a referee and a player."

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