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Fed Should Resist Market Pressure To Do More; The Consequences Of Additional Action Outweigh The Potential Benefits

Mohamed El-Erian profile picture
Mohamed El-Erian


  • In listening to market chatter urging the Federal Reserve to do more, I'm reminded of 2 simple insights I was exposed to years ago.
  • They don't help predict what the Fed will end up doing, but they help shed light on the possible consequences.
  • "There are times when the best thing to do is to do nothing." - Bill Gross.

In listening to market chatter urging the Federal Reserve to do more, I'm reminded of two simple insights I was exposed to years ago that have stayed with me. They don't help predict what the Fed will end up doing, but they help shed light on the possible consequences.

Early on in my career at Pimco, I remember Bill Gross, the firm's founder and legendary investor, reminding portfolio managers that "there are times when the best thing to do is to do nothing." It's important advice as most PMs are conditioned to continuously look for opportunities and react accordingly. They naturally get fidgety when market conditions dictate that the best thing to do is simply wait. The cost of ignoring Gross's advice ranges from unnecessarily wasting money on bid-offer spreads to ending up with less-optimal portfolio positioning.

Gross's advice should be heeded by Fed officials who are under pressure by markets to do more, including some combination of negative interest rates, yield-curve control, larger asset-purchase programs and more aggressive forward guidance - all of which, from a narrow market perspective, would help push even more investor money into risk assets such as stocks and high-yield bonds, thereby pushing their already elevated prices even higher. Yet there are few, if any, valid economic policy reasons to do so.

Consider four often-cited reasons for exceptional monetary policy actions:

Market functioning: After notable disruptions, U.S. financial markets are liquid and functioning well because of the Fed's emergency policy interventions, which, as Chair Jerome Powell acknowledged last week, "crossed a lot of red lines that had not been crossed before" as the central bank found itself in a "situation in which you do that, and you figure it out afterward."

Market volatility: Government interest rates have been rather range bound in recent weeks with

This article was written by

Mohamed El-Erian profile picture
Dr. El-Erian is Chief Economic Advisor at Allianz and member of its International Executive Committee. He chairs President Obama's Global Development Council, is a Financial Times Contributing Editor, a Bloomberg View columnist and author of the NYT/WSJ best seller "When Markets Collide." Dr. El-Erian formerly served as CEO and co-CIO of PIMCO, the global investment management company. He re-joined PIMCO at the end of 2007 after serving for two years as president and CEO of Harvard Management Company, the entity that manages Harvard’s endowment and related accounts. Dr. El-Erian also served as a member of the faculty of Harvard Business School. He first joined PIMCO in 1999 and was a senior member of PIMCO's portfolio management and investment strategy group. Before coming to PIMCO, Dr. El-Erian was a managing director at Salomon Smith Barney/Citigroup in London and before that, he spent 15 years at the International Monetary Fund in Washington, D.C. Dr. El-Erian has published widely on international economic and finance topics. His book, "When Markets Collide," won the Financial Times/Goldman Sachs 2008 Business Book of the Year and was named a book of the year by The Economist and one of the best business books of all time by the Independent (UK). He was named to Foreign Policy’s list of “Top 100 Global Thinkers” for 2009, 2010, 2011 and 2012. Dr. El-Erian has served on several boards and committees, including the U.S. Treasury Borrowing Advisory Committee, the International Center for Research on Women, the Peterson Institute for International Economics and the IMF's Committee of Eminent Persons. He is currently a board member of the NBER, the Carnegie Endowment for International Peace, and Cambridge in America. He chairs the Microsoft Investment Advisory Board. He holds a master's degree and doctorate (economics) from Oxford and received his bachelor and master degrees from Cambridge. He is an Honorary Fellow of Queens' College, Cambridge University.

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Comments (40)

lshiang profile picture
Fed can't cure COVID-19 while SP already recovered YTD. It is the time to pause and see.
@lshiang , I'm surprised you don't know the Fed has a team of scientis's working on a vaccine for coronavirus.
lshiang profile picture
@kimbillro It is the common sense that the Fed I am referring is Federal Reserve since the title of the article also imply it, not any department, commission or agency related to HHS.gov, CDC, FDA or NIH.
You missed the humor but I can now see why. You are using a google translator. Cheers
There are many other risks as well such as a newer, much more powerful "Occupy Wall Street", a narrative that is part of and fueled by discrimination and inequality. Higher risks of future covid outbreaks, political change, currency wars and China to name a few. At what point will investors still want to go long Treasuries?
A valid point and probably better justifies more protest than what we are seeing now.
Inequality cannot be addressed without addressing the divide. The top one percent of the usual income distribution holds over $25 trillion in wealth, which exceeds the wealth of the bottom 80 percent.
The gap between rich and poor in America is the worst it's been in more than a half century. It's a concern cited by many, but many may not realize what it actually means.
If a pie represented the estimated $98 trillion of household wealth in the United States, nine pieces, or 90% of the pie, would go to the wealthiest 20% in the country, according to a National Bureau Of Economic Research study of household wealth trends in the united states from 1962 to 2016. Out of those nine slices, four would go to just the top 1%.
The upper middle class and the middle class would share one piece, or about 10%, and the lower middle class would get .3% of the pie. The poorest Americans, people in the bottom 20%, wouldn't get any. On average, they are more than $6,000 in debt.
I'm only asking for one big slice of apple pie @A Catman .
I think it’s extremely classy that Mr. El Erian lavishes praise on Bill Gross despite Mr. Gross’ meltdowns at the end of his PIMCO tenure. Regarding the substance of the article, I fully believe Mr E-E is correct and also that the Fed will not heed his advice.
What has Bill Gross been up to lately? @RenoGuy
Good question. He'd gone to another money management position for a few years, and now I think he's retired.
Hopefully he retired near casinos in Reno, Nevada @RenoGuy .
thumbsoup profile picture
And the Fed should plan for what to do if there is a second wave of Covid 19 infection in the Fall. As should other government institutions and employers.

Perhaps save an action or two for a second wave scenario.

Why? Because resurgence of hospitalizations and deaths leads to economic impact.

Since reputable medical experts are worried about a second wave in Fall, but with unknown odds, I treat it as a 50/50 chance of occurring.

A belief that Summer conditions are helping us, indicates a belief that Fall and Winter may revert.

Kinda like the Fed providing support -- when the support is removed, you roll the dice.
No Fed or government support and we are all in a major 1929-1945 depression.
This is the only guy who's opinion I value on CNBC. Well done.
Excellent commentary and advice,thanks.
genco profile picture
07 Jun. 2020
Great advice, but you should have offered the Fed this 7 advice years ago. Maybe they would have figured out how to normalize interest rates by now and we wouldn't have the bubble that we have today.
Good summary, as expected, as usual. Thanks. Concerning interest rates, lower is not always of benefit. Interest paid is always someone’s income, and when that goes down their spending goes down. So it is better to do nothing, rather than lower interest rates, In fact, I think higher interest rates would help.
You can’t stop irresponsible people from spending money they don’t have, and it seems....you can’t stop responsible people from saving money they do.
Lower interest rates and deficit spending will put a foot on the neck of the lower class keeping them from being able to earn enough to save and advance even if they want to. The haves are just accumulating more and more since they require a larger nut to produce the same income.
We’re growing wealth disparity with our policies but worse, in an attempt to protect everyone from the consequences of their actions we are stifling both the irresponsible as well as the responsible in the younger age groups and the lower socioeconomic economic class.
Things have changed. What worked in the past won't work today.
Mountain Marmot profile picture
Great article and am taking Bill Gross' past advice quotation with a large portion of my investible assets by remaining in cash, unnervingly.
@Mountain Marmot s like to save too.
Seatonmanagement profile picture
Fair Points, thank you. Getting Federal Government elected officials to aid ALL Americans is an "incredible lift" currently, your last points spot-on. With a spectacular doubling of the FED's balance sheet, create some eventual inflation, though? Uncharted waters we seem to be in, ignoring our history at our peril.
Uncharted waters don’t have charts, Historic or otherwise to ignore.
Other Side Of Trade profile picture
Wisdom from Mr El-Erian in a forum usually dominated with short term thinking and narrow self interests. Thank you, sir.
That' not ideal @Other Side Of Trade .
GameBuzz profile picture
That’s because he wrote this for Bloomberg, not SA. 😉😉
Thanks for the article. Good point about venturing into negative rates creating a lose lose situation that is hard to get out of. Feeble, no growth, or negative growth in Japan and the EU despite negative rates. Plus damaging the banking, pension and insurance systems. I no longer have any direct investment exposure there, losing money is no fun.
diroha profile picture
The FED will have no choice but to continue to buy all sort of assets because the Federal deficit is impossible to finance privately without a huge spike in rates or the reduction in other asset prices. The Repo blowup last September is testament to this.
I agree @diroha .
You only need the Fed's safety net to rescue you in proportion to your irresponsibility and corruption. It's as if anyone...governments, corporations, institutions, people can do whatever they want and if things go bad, there is the Fed to save them. The latest going-off-the-deep-end decisions of governments and the medical mafia resulted in shutting down the world's economy based on no specifics or actual facts or truth. No more bailouts, period. The Fed is only exacerbating the corruption of the economy and financial system because capitalism and the free market are being severely distorted.
So what @nestor7 ?
The voice of reason. Will it be heeded, probably not. But this is America. And here, hope springs eternal in the human breast.
We had the voice of reason during 1929-1932 and there was a 90% drop in the stock market with a horrid depression @nopilikia .
Lets all hope no repeat 1929-1932. Nor having the world go to war to get us out of that depression.
Yes @nopilikia , that is why we need Fed and Government help.
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