El-Erian says markets took tapering too far, calls Bernanke dovish

Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said Federal Reserve Chairman Ben S. Bernanke was “relatively dovish” in his outlook on the U.S. economy and monetary policy. Bernanke said in prepared comments before testimony to Congress that the central bank's asset purchases “are by no means on a preset course” and could be reduced more quickly or expanded as economic conditions warrant. Markets “took the tapering too far,” El-Erian, also co-chief investment officer with Pimco founder Bill Gross, said in an interview on Bloomberg Television's “In the Loop” with Betty Liu. Yields on 10-year U.S. notes may drop to 2.2 percent this year from the current 2.47 percent, El-Erian said. The Fed chairman's remarks highlight the Federal Open Market Committee's desire to assure that the economy and labor markets have sufficient momentum before reducing its $85 billion in monthly bond purchases. Treasury yields have jumped since June 19, when Bernanke outlined a possible timetable for tapering purchases. “This testimony is the relatively dovish Bernanke,” El-Erian said. “He's giving these different signals trying to strike this delicate balance, but it's really tough.” Balance Sheet The 10-year yield rose as high as 2.75 percent this month from 1.93 percent on May 21, the day before Bernanke said the FOMC may trim its bond buying in its “next few meetings” if officials see signs of sustained improvement in the labor market. Bernanke today said the Fed's balance sheet would remain elevated after purchases of mortgage bonds and Treasuries end. Fed officials estimate the 6.5 percent unemployment threshold could be reached by the end of next year. That outlook is based on estimated growth of 3 percent to 3.5 percent for the economy in 2014, according to the committee's June central tendency estimates, which are higher than the 2.9 percent estimate of private forecasters in a Bloomberg survey. “The underlying economy is still quite fragile,” El-Erian said. “If you put the fundamentals with the technicals, they would call for lower yields from here.” (Bloomberg News)