NEW YORK, June 7 (Reuters) - Mohamed El-Erian, the chief executive officer and co-chief investment officer of bond giant PIMCO, told CNBC on Thursday that chances of a third round of bond purchases by the Federal Reserve have increased amid slowing global growth.
El-Erian, who helps oversee over $1.77 trillion, said: “Every day that Europe deteriorates further and we slow, the probability of QE3 goes up.” He was referring to the unconventional monetary tool known as Quantitative Easing.
Investors were mildly disappointed after Federal Reserve Chairman Ben Bernanke offered few hints that further monetary policy stimulus was imminent.
Bernanke, in testimony to Congress, said the central bank was closely monitoring “significant risks” to the U.S. recovery from Europe’s debt and banking crisis, but he struck a different tone from the Fed’s No. 2 official, who argued in favor of monetary support on Wednesday.
“I think it’s pretty unambiguous that we are slowing. And when I say ‘we,’ as much as the U.S., it’s every part of the world,” said El-Erian, who named Russia, China, Brazil and the United States as slowing nations whereas Europe is “in a recession.”
For its part, China delivered twin surprises on interest rates on Thursday, cutting borrowing costs to combat faltering growth while giving banks additional flexibility to set competitive lending and deposit rates in a step toward liberalization.
El-Erian said the mood swings of the markets following China’s rate cuts are a reflection of the limitations of central bank policy.
“The problem is people are realizing that while central banks can do something, they can’t guarantee good economic outcomes,” he said.
El-Erian added that the market “is dominated by traders as opposed to investors,” and the former skip in and out of trades, leading to inconsistencies in risk sentiment.
In reference to Bernanke’s testimony, El-Erian said that Bernanke wants to “shift the burden to Congress” because he has recognized that central bank policies may not prove effective.
El-Erian said that investors should anticipate central bank reactions to the global slowdown by investing in “what they know,” especially higher-quality assets. He cautioned that high-yield bonds and equities presuppose that central banks will deliver effective outcomes but said there are still opportunities to invest in stocks at low prices.