Pimco's El-Erian: Fed risks Japan style growth

NEW YORK, April 29 Wed Apr 29, 2009 3:05pm EDT

NEW YORK, April 29 (Reuters) - The Federal Reserve runs the risk of a Japanese-style economic scenario of prolonged slow growth and deflation if policymakers prematurely relax monetary policy, said Mohamed El-Erian, the chief executive of bond giant Pacific Investment Management Co.

The Fed said the pace of deterioration in the U.S. economy appeared to be slowing, but said it would continue to keep interest rates exceptionally low for an extended period.

"Especially when compared to their last statement, today's statement suggests that policymakers are now comfortable with partially taking their foot off the liquidity accelerator," El-Erian told Reuters following the U.S. central bank's interest-rate decision on Wednesday.

"In doing so, they are taking a calculated risk that the 'green shoots' will indeed develop more endogenously into a deeper and sustainable recovery. The risk, and it is not immaterial, is that we end up with the Japanese scenario whereby policy support is withdrawn prematurely."

(Reporting by Jennifer Ablan; Editing by Diane Craft)

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