Investors have grown complacent, failing to fully appreciate the risk present in financial markets, says Mohamed El-Erian, chief economic adviser to Allianz and former CEO of Pimco.
Moderate economic growth and a "Federal Reserve that is transparent, measured and supportive of asset markets" have sparked the complacency, he writes in the
Financial Times.
"Investors have taken these two factors as signaling a predictable and extended period of economic, financial and policy calm."
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But Fed officials themselves acknowledge that their sustained easing might lead to financial instability, El-Erian notes.
"This suggests that, rather than continuously increasing exposure to ever-rising markets, it is time for highly exposed investors to gradually take some chips off the table," he argues.
Central bankers are willing to risk financial instability later for economic growth now. That calls for "incremental prudence that today’s marketplace appears overly hesitant to adopt," he writes.
The Fed has left its federal funds rate target at a record low of zero to 0.25 percent since December 2008. And the central bank's balance sheet has mushroomed to $4.3 trillion.
Former Fed Vice Chairman Alan Blinder says bond prices are likely to suffer from squabbles among Fed policymakers over how fast to raise interest rates and trim the balance sheet.
"I worry about ructions in the financial markets, as the Fed starts making more and more noises about exit strategies of various sorts," he tells
MarketWatch.
"I think there is likely to be a vocal debate over that. And that will hurt [boost] interest rates. It might hurt stock prices too, but it will certainly hurt interest rates."
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