Fed Wants Inflation Now, Will Clean Up 'Mess' Later: El-Erian

The Federal Reserve and Chairman Ben Bernanke not only are willing to tolerate inflation but actually are trying to create it, with a "mess" left behind for their successors to clean up, Pimco's Mohamed El-Erian told CNBC.

Mohamed El-Erian, chief executive officer and co-chief investment officer of PIMCO
T.J. Kirkpatrick | Bloomberg | Getty Images
Mohamed El-Erian, chief executive officer and co-chief investment officer of PIMCO

The reason, the Pimco CEO said, is that the risks outweigh the rewards as the central bank tries to stimulate an economy that still is foundering three years after the financial crisis recession ostensibly ended.

El-Erian has called the policy a "reverse Volcker moment," in reference to former Fed Chairman Paul Volcker, who rose rates and deliberately put the nation into recession in the early 1980s to control runaway inflation.

"Not only will they tolerate higher inflation, not only will they wish for higher inflation, but they actually may target higher inflation," El-Erian, who helps run the largest bond fund in the world, said during a "Squawk Box" interview.

In an unprecedented move, the Fed last week announced it was embarking on a third round of quantitative easing that will continue until the economy reaches an unspecified target in the jobless rate.

The unemployment rate is mired at 8.1 percent while core inflation — excluding volatile food and energy prices — remains within the Fed's desired range of 2 percent. Economic growth, meanwhile, was just 1.7 percent in the second quarter.

The Fed will buy $40 billion of mortgage-backed securitieseach month, a move it hopes will drive down the already record-low rates for home loans and spur economic growth that in turn will drive down unemployment.

But critics charge that the balance sheet expansion, which will go well past $3 trillion, is causing inflation. Former Fed governor Kevin Warshtold CNBC last week that the Fed will have a difficult time finding an exit from the years of QE programs, a point on which El-Erian agreed.

"This is true for all central banks — the (European Central Bank), the Fed, the Bank of Japan, the Bank of England. We are so deep into unfamiliar territory, so deep into experimental mode, that we don't know what the consequences will be," he said. "Whoever comes afterward will have to clean up the mess."

Despite the perils, El-Erian said, investors ought to "play the wave of central bank liquidity," with financials likely to benefit, though he warned that investing will be a difficult minefield to navigate because of Fed policy.

"This is a historical bet that our kids will be reading about in history books," he said.