Pimco's El-Erian: Unintended consequences from Fed move
NEW YORK (Reuters) - The CEO of bond giant PIMCO hailed the Federal Reserve's cut of its main U.S. interest rate target as low as zero as an "extremely bold policy response" but warned of possible unintended consequences.
Aggressive moves by the U.S. central bank could send the U.S. currency under tremendous pressure and could result in even further disarray in capital markets, Mohamed El-Erian told Reuters on Tuesday.
But the latter, or the "outcome of messing around market relationships," could be the more difficult unintended consequence, El-Erian later told CNBC TV.
"There is a reason why market systems do better when the government is simply a referee as opposed to being a part of the team," he said. "The government is not just a referee but a market player -- and we don't know what happens in that world."
El-Erian helps oversee roughly $800 billion at Pacific Investment Management Co., or PIMCO.
"After this 'wow' statement, there should be no question about policy willingness," El-Erian told Reuters, shortly after the U.S. central bank chopped the target to a range of between zero and 0.25 percent.
The Federal Reserve also said it would "employ all available tools" and evaluate other measures, such as purchasing U.S. Treasury securities, to lift the economy.
El-Erian said the Treasury's move "is an incredibly strong public declaration that the Fed will throw everything it has in attempting to stabilize the financial and economic situation."
The Dow Jones Industrial Average, which traded around 110 points higher before the Fed's announcement, closed up 359.61 points, or 4.20 percent, to trade at 8924.
Other markets traded higher following the Fed. Yield spreads on Fannie Mae and Freddie Mac "federal agency" debt extended their recent rally after the Fed reinforced its intent to purchase the bonds.
Yield spreads on agency debt securities in the 5-year sector tightened by 12-13 basis points against Treasuries versus the prior close.
"The remaining issue, however, is on "the pace of policy effectiveness, including both intended and unintended consequences of this extremely bold policy response," El-Erian added.
