Pimco’s El-Erian: Fed 'Terrified' of Deflation

The Federal Reserve will announce a new round of easing next week because it is “terrified” of deflation, Mohamed El-Erian, chief executive officer of Pimco, told CNBC.

He doesn't believe a restart of the Fed's quantitative easing, or QE, at its Nov. 2 and 3 meeting will be very effective in delivering high economic growth or low unemployment.

"QE is meant to drive down the price of safe assets so much that we are all pushed into doing something risky," El-Erian told CNBC.

Since the Fed first hinted at a new quantitative easing program in August, the dollar has weakened and risk assets, like stocks and commodities, have surged.

El-Erian didn’t make a specific forecast on the amount of Treasuries the Fed would purchase, but he did say he will be looking for some "constructive ambiguity" in the Fed's statement, which would give it options.

El-Erian said the auction Monday of 5-year Treasury Inflation Protected Securities (TIPS) at a yield of negative 0.55 percent shows the economy is not gaining traction.

“I think it’s an indication that the unthinkable and the improbable, or at least what used to be unthinkable and what used to be improbable, is not only possible but is the reality,” he told CNBC.

Meanwhile, The Wall Street Journal reported that the Fed is likely next week to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months.

What the Journal report called a "measured approach" compares with investors' base-case scenario of an initial commitment to buy at least $500 billion in Treasury debt over five months, in an effort to spur lending and to support an economic recovery that is too weak to tame high unemployment.

The Journal gave no source for the report on its website and said that, although details remain to be sorted out internally, the broad outlines have taken shape.

But Robert Wiedemer, co-author of the best-selling book “Aftershock,” which predicts two more economic bubbles directly ahead for the U.S., told Moneynews that the Fed’s plans to stimulate the economy via fresh injections of cash into the money supply will jack up inflation rates.

The Fed is expected to roll out a new quantitative easing program under which the monetary authority buys government debt from banks with freshly printed money in order to spur those banks to lend more.

“The short term impact is clearly going to be positive for the stock market, but I’m not so sure it’s going to be as positive for the economy as people would like to think,” says Wiedemer, president of the Foresight Group, a macroeconomic forecasting firm that customizes its forecasts for specific businesses and investment funds.

“Long term though, what this is clearly going to do is increase inflation. Our money supply has already increased by 250 percent. If we increase it by another 100 percent or another 200 percent, at what point do you get inflation? A 400 percent increase in money supply? It’s going to come.”