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Fed Easing Has Helped China and Brazil: El-Erian

Thursday, 9 Jun 2011 | 10:05 AM ET

The Federal Reserve's aggressive monetary easing policies have actually helped boost emerging global economies more than the still-sluggish US, Pimco's Mohamed El-Erian told CNBC.

Pimco's Mohamed El-Erian
CNBC.com
Pimco's Mohamed El-Erian

The central bank's two-part quantitative easing strategy—QE1 and QE2 in market jargon—has been credited both with spurring a strong US stock rally and stoking inflation both globally and domestically.

But El-Erian said the debt-buying programhas had a bigger impact outside the US shores and is now actually forcing some emerging economies—particularly Brazil and China—to start slowing their rapid growth.

"They're tapping the brakes now because of the amount of capital that is flowing there and is overheating their economy," said El-Erian, co-CEO at Pimco, which manages $1.2 trillion in assets and the largest bond fund in the world.

Critics of QE say much of the money the Fed spent buying debt such as Treasurys and mortgages from financial institutions was actually invested in higher-yielding foreign assets—not in the US economy. Cheap dollars have flooded those foreign economies, sparking complaints over a surge in asset prices, particularly commodities

"The QE2 splashed everywhere," El-Erian said. "It splashed into the commodities market, it splashed into other countries and some of it splashed here and we got a bit of a cyclical recovery. But we're finding out we're not getting enough of a cyclical recovery."

With China GDP humming along at 9.7 percent and Brazil at a solid 4.2 percent, the two so-called BRIC nations—Russia and India complete the quartet—find themselves grappling with ways to control the money flows created since the Fed expanded its balance sheet to more than $2.5 trillion of money printing.

Pimco's El-Erian on Economic Growth
Housing, credit, public finances, and the labor areas of the economy are currently impaired and until the country gets over those structural impairments, economic growth will be tough for a while, says Mohamed El-Erian, Pimco CEO/Co-CIO, who also mentions that Washington needs a growth strategy in order to get over these headwinds.

In the US, inflation fears also are rising. But with GDP an anemic 1.8 percent the dilemma is different—with rising prices but high unemployment, crushing debt and lagging housing forming structural impediments to growth.

Even so, El-Erian does not see the Fed embarking on another round of easing, nor does he forecast the US slipping into a technical recession—generally defined as two consecutive quarters of negative growth.

"There's simply too much liquidity in the system," he said. "You would need a major policy mistake, or you would need a major unanticipated shock for you to get a recession."

Critical policy decisions, though, face the US as it tries to reduce its debt burden. El-Erian warned that if policy makers do not attack the problem now, worse consequences await later.

"The danger we face if you continue to kick the can down the road, the institutions, be it the multinationals or especially the Fed (are) going to go from being part of the solution to part of the problem," he said. "That is what we want to avoid."

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