Daily Ticker

Fed-Assisted Growth Stuck at 2% “New Normal” Rates Through 2013

The Federal Reserve begins its two-day policy-making meeting today and not much news is expected, as has been the case ahead of many of the most recent meetings.

Why?

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The central bank has clearly stated it will continue its $85 billion per month bond-buying program until the unemployment rate drops to 6.5% and as long as inflation remains stable. The jobless rate for fell from 7.7% to 7.6% in March and remains well above the Fed's threshold for drawing back its monetary stimulus.

That said, inflation has been falling and may be even more reason for the Fed to continue its current program. The Wall Street Journal's Jon Hilsenrath details as much in a recent article:

The Commerce Department reported Friday that its personal consumption expenditure price index—one of the Fed's favored measures of consumer price inflation—was up 1.2% in the first quarter from a year earlier, well below the central bank's target. It was the weakest annual reading since the third quarter of 2008, when the U.S. was consumed by the financial crisis.

The Fed tries to keep inflation stable near 2%, a level that central-bank officials believe supports steady economic growth and hiring. A slip much below that level could signal a weakening economy and flat wages.

Ahead of the Fed's policy meeting, The Daily Ticker sat down with Mohamed El-Erian, CEO and co-chief investment officer at PIMCO, to get his take on what the Fed may or may not do.

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"I don't think anything changes policywise. I think signals change," says El-Erian, noting that in recent weeks the Fed has hinted it might "taper" down its bond-buying. "That narrative, I think, is going to stop and the Fed is going to reinforce this notion that they are committed to their objectives and they may not necessarily taper off."

In theory the Fed could do more to help reinvigorate the economy, which grew at a paltry 2.5% in the first quarter of 2013, but the Fed must "be careful," he says.

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"The benefits of what they are doing comes with costs and risks," El-Erian adds. These are "highly experimental policies. We are not sure what the side effects are [and] there is already collateral damage."

A better solution would be for Congress to pick up the slack, says El-Erian. "The problem with the dysfunctional congress is that we have others that are not doing more."

To his point, he believes we need to find a better solution to the sequester cuts. "We need to recognize that we have gotten the logic wrong," he says. "We need clarity on medium-term fiscal reform so that businesses can invest and so households know what [they] look like and in the short-run we don't need contraction. We've got it the other way around. We have contraction now and complete uncertainty on what lies ahead and the result of that is that the economy contracts even faster contraction."

As it stands, he says the most recent GDP figures show that the economy is "weak" as they sit well below the 3-4% expected growth projections. What we have today is "assisted growth" fostered by the Fed's monetary policies.

"I think unfortunately we are stuck for another year at the 2% new normal growth. I think unfortunately unemployment will remain too high. And, I think unfortunately we are going to continue to depend on the Fed as opposed to having that handoff to genuine growth."

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