Pacific Investment Management Co.'s Mohamed El-Erian said the U.S. Federal Reserve will start to reduce its unprecedented asset purchases because it sees the economy healing and aims to prevent unintended consequences of its monetary policy, such as excessive risk taking.
“In all likelihood, the Fed will taper for a mix of reasons,” El-Erian, chief executive officer and co-chief investment officer of the Newport Beach, California-based firm along with Bill Gross, wrote in a September viewpoint published on Pimco's website today. “It will likely be comforted by the notion that the American economy continues to heal, but also frustrated by the gradualism of the recovery and the threat of collateral damage.”
The Federal Open Market Committee is scheduled to meet Sept. 17-18 to consider the future of the third round of quantitative easing known as QE3. Economists expect the Fed to reduce monthly asset purchases to $75 billion from $85 billion, according to a Sept. 6 Bloomberg News survey. The central bank will also release its 2016 economic projections next week for the first time, including the outlook for the benchmark rate, which it has kept at a record-low range of zero to 0.25 percent since December 2008.
While there's not enough evidence to suggest that the economy is strengthening decisively, market perceptions of a change in Fed policy and withdrawals from bond funds have resulted in Treasuries being a “technically damaged” asset class for now, said El-Erian. Investors should focus on shorter maturities and consider Treasury Inflation-Protected Securities as a hedge, he said.
Gross's $251 billion Pimco Total Return Fund, the world's largest mutual fund, contracted by more than $41 billion, or 14 percent of its assets, in the past four months through losses and investor withdrawals.
Last week, Gross said in a Bloomberg radio interview the Fed will go ahead with its plan to reduce its bond purchases despite a disappointing jobs report, and focus on a “taper lite” of about $10 billion in Treasury bonds.