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How ‘tapering’ of Fed bond buying could affect global growth

Mohamed El-Erian is the CEO of the investment firm PIMCO, the world’s largest bond investor. In an interview, he discusses what might affect the Fed's decision to begin tapering its asset purchases and what impact such a move may have on the global economy.

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Federal Reserve Board Chairman Ben Bernanke testifies before the Joint Economic Committee on Capitol Hill June 7, 2012. In May 2013, Mr. Bernanke said that the central bank was prepared to cut back its bond-buying program if the economy looked strong enough. Wall Street has been awash with speculation over the Fed's timing ever since.

J. Scott Applewhite/AP/File

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 Mohamed El-Erian was interviewed last week by Global Viewpoint Network editor Nathan Gardels about the likelihood that the US Federal Reserve will soon begin tapering its asset purchases.

NATHAN GARDELS: What does the reverse flow of capital out of the emerging markets back to the advanced economy due to Fed “tapering” mean for global growth?

MOHAMED EL-ERIAN: Much depends on why the Fed is tapering.

It would be good news for global growth if the Fed is tapering for “good” reasons – meaning that the central bank has strong reasons to believe that the US economy is approaching “escape velocity.” In such circumstances, the taper would signal that, after too many years of sluggish growth, the US is resuming its role as an engine of global growth.

But the Fed could also taper for “bad” reasons – that is to say that its prolonged experimentation with unconventional monetary policy threatens to create too much collateral damage and unintended consequences. In these circumstances, the taper, which involves reduced Fed support for markets and the global economy, would indicate growing policy effectiveness.

This fundamental distinction is important, as global markets will likely amplify whatever signals come out of the Fed.

In most likelihood, the Fed will taper for a mix of reasons. Specifically, it will likely be comforted by the notion that the American economy continues to heal, but frustrated by the gradualism of the recovery and the threat of collateral damage.     

GARDELS: How much was the emerging economy’s development due to this cheap money? What must they do to sustain growth in the absence of low Fed rates?

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