El-Erian Says Fed's High Rates Are at Odds With Market

News May 17, 2024 at 02:23 PM
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Mohamed Aly El-Erian, chief economic advisor for Allianz

The Federal Reserve's delay of interest-rate cuts in a bid to temper inflation runs the risk of falling behind the curve, according to Mohamed El-Erian.

"The Fed pivoted on the basis of data. It was the opposite of the pivot that they did in December — now they have to do a U-turn,"  El-Erian, the president of Queens' College, Cambridge and a Bloomberg Opinion columnist, told Bloomberg Television on Friday.

"As they are doing the U-turn and stay higher for longer, the market is going the other way," he said.

"The Fed is going to have to pivot — not on the basis of inflation numbers, but the basis of the real economy," he added.

Like other market watchers, El-Erian has previously raised the possibility that the U.S. central bank should look beyond its 2% inflation target in a new era of structurally higher pressures on price growth.

"Is the inflation target the right target? We all talk about wanting to go back to 2%," El-Erian said. "Two percent is totally arbitrary. If we are pursuing the wrong inflation target, the risk of a mistake — that mistake would mean sacrificing growth unnecessarily — the risk of a mistake is high."

"It's a world that's subjected to higher inflation. And we've come from a world that was subject to lower inflation," he added.

On Wednesday, Treasuries rallied after a reading of consumer prices showed that headline growth eased in April, with investors bolstering wagers that the Fed will ease by as many as two quarter-point cuts come December.

But inflation reports have also illustrated that for some areas of the service economy price growth is proving harder to tame.

(Credit: Bloomberg)

 

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