PIMCO's Mohamed El-Erian says that he expects a drop — or taper — of about $10 billion to $15 billion in the level of the government's monthly asset purchases when the Federal Open Market Committee meets Tuesday and Wednesday.
The Fed's current leader, Ben Bernanke, is expected to step down in January, when his second term as chairman expires. A top candidate for the job, Larry Summers, withdrew his name for the post on Sunday amid growing opposition among Democrats.
"Suddenly, Janet Yellen has regained her status as frontrunner; that signals to the market more policy continuity, which the market takes well," El-Erian (left), PIMCO CEO and co-CIO, said on CNBC early Monday. "The yield curve gets anchored, you get a bull steepener, the front end does well, repression of volatility, the equity market, the credit market like that, and [what] you get is a broad-based rally, and that's what we're getting this morning."
(Other names batted around, observers say, include former Fed Vice Chairman Donald Kohn and former Treasury Secretary Timothy Geithner.)
Investors may enjoy the Yellen rally, but whoever is ultimately chosen for the post "won't have as much room for maneuver as people expect," El-Erian noted.
Over the next 12 months, the market expert predicts three things to happen at the Fed with respect to quantitative easing.
"First, they will taper. They'll taper small to begin with, but they will taper," he said, coming down from the current $85 billion-a-month bond-buying level.
Second, the Fed is "likely to favor the mortgage market, which means they'll taper more with Treasuries in proportional terms," El-Erian noted.
Third, he believes, the Fed will give itself "quite a bit of wiggle room" due to future uncertainly. In addition, it will "strengthen the forward guidance in order to minimize the impact on markets of the taper."
Once this process is over, the PIMCO executive said, "I don't think you're going to see an increase in interest rates, because the economy remains weak. We're nowhere near escape velocity."
