Mohamed El-Erian, chief executive and co-chief investment officer at PIMCO, examines the Fed’s central message in Tuesday’s FOMC statement and notes the next few days in the markets will reveal more about its impact.
_____________________
As expected (see Sunday’s post), the Federal Reserve signalled a more sluggish outlook for the US economy, reiterated its willingness to take additional measures but stopped short of concrete actions. Its central messages came with qualifications, reinforcing the characterisation of an “unusually uncertain” outlook and the impression of vigorous FOMC discussions.
The initial market reaction to the Fed announcements was an enthusiastic one, with virtually all asset classes rallying meaningfully. By the end of the US trading day, however, greater differentiation was evident.
US Treasuries and gold ended higher in prices while the equity rally fizzled (with major US indices ending narrowly mixed). The dollar sold off against both the euro and yen, fuelling renewed talk of currency tensions and intervention.
The next few days will shed light on the durability of these market reactions. If sustained, they will speak to an important issue that Fed chairman Ben Bernanke raised in his Jackson Hole speech – namely, the delicate balance that the Fed must strike between the benefits, costs and risks of additional policy measures.
Over the next few weeks, the Fed will provide additional information on the extent of its downward data revisions and the extent of debate within the FOMC. In the process, we will also be reminded of the distinction between the Fed’s willingness to do more (which is generally, but not universally high) and its ability to deliver specific outcomes (which is significantly more uncertain).
________
The writer is CEO and co-CIO of PIMCO. Some of El-Erian’s earlier commentaries for FT Alphaville are available here.
Related links:
FOMC follow-up – FT Alphaville
Fed clears decks for further easing – FT
Fed moves closer to further easing – MoneySupply
Steep path to a modern-day Plaza Accord – FT