El-Erian: Fed’s Economic Projections Overly Optimistic

“The Federal Reserve’s economic forecasts are probably too high, says Mohamed El-Erian, CEO of fund giant Pimco.

The central tendency of predictions by Fed policymakers calls for economic growth of 2.3 to 2.6 percent for this year and 3 to 3.5 percent for 2014. Gross domestic product expanded only 1.8 percent in the first quarter.

Fed Chairman Ben Bernanke said June 19 that the central bank would probably start tapering its quantitative easing later this year if the economic expansion matches its projections.

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“If the forecasts prove correct, which, unfortunately, we question given current economic realities, the Fed would have a positive reason to exit gradually from its prolonged highly experimental monetary policies,” El-Erian told The New York Times in an email.

“It is also apparent that the Fed is getting more concerned about the ‘costs and risks’ of its policy experimentation.”

Interest rates spiked after Bernanke’s June 19 comments, sending the 10-year Treasury yield to a 22-month high of 2.66 percent last Monday. The yield stood at 2.49 percent mid-day Monday.

While the rate increase may have created some bargains among Treasurys, El-Erian said, “investors should also note that markets remain vulnerable to technical overshoots and, thus, quite a bit of volatility.” ….”

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