Pimco’s El-Erian: Fed Will Launch QE3 Soon

Monday, 08 Nov 2010 08:06 AM
By Forrest Jones

The Federal Reserve's plan to buy $600 billion in bonds won't help the economy much, so the country should prep for fresh rounds of similar actions from the monetary authority, says Mohamed El-Erian, co-head of Pimco, the world's largest bond fund.

The move, known as quantitative easing, is defined as when the Federal Reserve buys debt held by banks, thus freeing them to invest.

Yet this latest round, the second of its kind, will encourage banks to invest money abroad and fails to fundamentally boost the economy, El-Erian writes in the Financial Times.

"Without meaningful structural reforms, part of the Fed’s liquidity injection will leak right out of the U.S. and result in yet another surge of capital flows to other countries," he wrote.

"The rest of the world does not need this extra liquidity."

With little change at home, the Fed will carry out a third round of quantitative easing to get the U.S. economy going again.

“With domestic outcomes again falling short of policy expectations, it is just a matter of time until the Fed will be expected to do even more,â€