The Federal Reserve and other central banks may have increased income inequality with policies that boosted prices of stocks and other assets without having a commensurate effect on the economy, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co.
In a lecture prepared for delivery at the Fed Bank of St. Louis today, El-Erian said central banks may be nearing the limits of their ability to spur growth and suggested that the “collateral damage” their policies are having on the economy and financial markets may soon outweigh the benefits.
“The unusual activism of central banks may, at the margin, have worsened further wealth distribution,” said El-Erian, whose company is manager of the world’s largest bond fund (PTTRX:US). “To the extent that such policy activism succeeds in bolstering asset values, but not the real economy, the rich benefit disproportionately.”
President Barack Obama highlighted income inequality this week as he campaigned for higher taxes on top U.S. earners and criticized Republicans for opposing them. Tax fairness will be a central theme in the president’s re-election bid, Obama campaign manager Jim Messina told reporters on April 9.
While the Fed and other major central banks did forestall a global depression, they have had less success in promoting a full-fledged recovery, El-Erian said.
Policies of ultra-low interest rates and bond purchases have caused distortions in financial markets, including the promotion of “risk-on” and “risk-off” trading strategies, the former International Monetary Fund official said. Other “unintended consequences” of the bankers’ policies are a shrinking money market fund industry in the U.S. and increased financial pressure on pension funds, he said.
“Central banks in advanced economies needed -- and need -- help from other policy-making entities to deal with the twin unfortunate reality of too much debt and too little growth,” said El-Erian, who is also co-chief investment officer at Newport Beach, California-based Pimco.
In Europe, the central bank’s “powerful” provision of money to the region’s banks is “not a panacea” for the troubles afflicting the 17-nation euro zone, he said.
“Unless it is helped by others, there is likely to be a limit out there to how long it can, on its own, stop a liquidity problem in Italy and Spain raising concerns again about a solvency one,” El-Erian said.
He said he saw a risk of a “disorderly fragmentation” of the currency union if governments there fail to shore it up structurally and financially.
Yields on Spain’s 10-year government bonds have risen about one percentage point since March 2, when Prime Minister Mariano Rajoy said the country would miss its 2012 deficit goal approved by the European Union.
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