Pimco’s El-Erian: I Fear Economy Will Lose Steam Like Past 2 Years

Pacific Investment Management Co.’s Mohamed El-Erian said lower than-forecast U.S. growth suggests additional monetary stimulus remains on option for the Federal Reserve even though there is no immediate need for action.

“If we continue this weakening trend, the Fed will come back in and try to sustain this market and this economy,” El- Erian, the chief executive officer of the world’s largest manager of bond funds, said during an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “I don’t think there is an immediate need now.”

The central bank remains “prepared to do more as needed,” Fed Chairman Ben S. Bernanke said on April 25 at a press conference following a meeting of the Federal Open Market Committee in Washington, where policy makers reiterated their pledge to keep borrowing rates at record lows through 2014.

Gross domestic product, the value of all goods and services produced in the U.S., rose in the first quarter at a lower-than-forecast 2.2 percent annual rate after a 3 percent pace, Commerce Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a 2.5 percent rise.

“What I worry about most is a repeat 2010 and 2011,” said El-Erian, “where we start the year really strongly and, come the second and third quarter, it slows down and we lose momentum that is so important to sustain a really good recovery.”

‘Cooling Off’

The U.S economy needs to add 250,000 to 300,000 jobs every month if we are to “seriously start reducing unemployment to something that is acceptable,” El Erian said. “The labor market is cooling off and doing so too early.”

Hiring by American employers trailed forecasts in March, with the 120,000 increase in payrolls reported by the Labor Department the smallest in five months and less than the most pessimistic estimate in a Bloomberg News survey of economists. The unemployment rate fell to 8.2 percent from 8.3 percent as people left the labor force.

Fed officials forecast April 25 the unemployment rate would average 7.8 percent to 8 percent in the final three months of this year versus a forecast of 8.2 percent to 8.5 percent in January, according to central tendency estimates.

The central bank is pursuing a maturity-extension program announced in September to replace $400 billion of short-term debt in its portfolio with longer-term securities. The Fed purchased $2.3 trillion of debt in two rounds of quantitative easing that have become known as QE1 and QE2 as part of its efforts to support the world’s biggest economy.

‘Retooling and Retraining’

Policy makers need to do more outside of monetary policy to heal the economy, El Erian said.

“We need labor retooling and retraining, we need education reform and public-finance reform,” El-Erian said. “There is a whole set of things that need to be done that aren’t being done. Therefore the economy is going forward, but going forward much slower than what is needed.”

Pimco’s Total Return fund, the world’s largest mutual fund at $252 billion, has returned 5.9 percent in the past year, beating 53 percent of its peers, according to data compiled by Bloomberg. It gained 1.7 percent during the past month, better than 99 percent of competitors.

Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.77 trillion of assets as of March 31, including assets managed on behalf of its parent’s affiliated companies.