PIMCO: End of mortgage buys form of tightening

Mohamed El-Erian, CEO of Pacific Investment Management Company (PIMCO), gives the keynote address at the Symposium on Interest Rate Risk Management in Arlington January 29, 2010.

NEW YORK (Reuters) - The end of the Federal Reserve's program of purchasing $1.25 trillion of mortgage-backed securities at the end of March is a form of tightening monetary policy, the chief of the largest U.S. bond fund manager said on Tuesday.

Mohamed El-Erian, chief executive and co-chief investment officer of Pacific Investment Management Co, or PIMCO, said the end of the Fed's mortgage program, one of the U.S. central bank's major support programs, signals a form of credit tightening.

The Federal Reserve Open Market Committee's statement on Tuesday "met market expectations on the three key aspects of leaving interest rates unchanged, maintaining dovish language about future policy moves and allowing the special programs to lapse," El-Erian told Reuters.

By the end of March, the Fed plans to have bought $1.25 trillion worth of mortgage-backed securities and about $175 billion worth of agency debt -- a process economists and investors have called "quantitative easing."

The unwind of the program weans the U.S. economy from government support at a time when the Fed believes the recovery is gathering some strength.

In fact, Fed officials said the overall economy is improving. In their statement, they said: "Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing," it said.

That said, there were words of caution in the Fed's statement, which accompanied the decision to renew its pledge to keep interest rates near zero for an "extended period."

The Fed said household spending is expanding at a moderate rate "but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit."

El-Erian said the statement confirms that the resurgence in economic activity from the global financial crisis is "likely to be bumpy and generally disappointing when compared to previous recoveries."

(Reporting by Jennifer Ablan; Editing by Dan Grebler)