Mohamed El-Erian.
Jason Reed/Reuters
Mohamed El-Erian believes the Fed and financial markets aren’t listening to what the other is signaling.
So the top economist scripted a chat between the two to highlight the missed messages and risks.
He believes markets are fixing on the news they want to hear and not on the Fed’s warnings.
Financial markets and the Federal Reserve just aren’t listening to what they’re telling each other, Mohamed El-Erian believes — so he’s imagined the two talking like an old married couple to show what’s being missed.
The chief economic advisor at Allianz came out with a hypothetical conversation between Fed Chair Jerome Powell and markets in a Bloomberg opinion piece Thursday. He paints investors as fixated on the good news and not on the Fed’s warnings — and that’s not good for the health of the US and global economies, he believes.
In the chat, Powell asks: “Did you listen to ALL that I said on Wednesday at the Brookings Institution?”
The markets respond: “We heard one thing more than anything else. You are definitely going to slow the pace of interest rate hikes starting as early as this month!”
You were totally unambiguous in stating that ‘the time for moderating the pace of rate increases may come as soon as the December meeting.’ That is dynamite!”
Powell signaled at Brookings that the Fed could slow the pace of interest rate hikes as soon as this month. His remarks sparked a strong rally in US stocks Wednesday, with the Nasdaq Composite gaining 4%.
But the Fed’s messages just aren’t getting through to markets on just hearing the good news — and that’s not good for the health of the US and global economies, Mohamed El-Erian believes.
He flagged that markets are turning a deaf ear to Powell’s warnings that the Fed has more ground to cover in fighting inflation and its caution about not loosening policy too soon.
The US central bank has been lifting interest rates at the fastest pace in history to combat decades-high inflation running through the US economy. It’s hiked the benchmark rate by 75 basis points four consecutive times, and markets are expecting officials to deliver a 50-basis point hike in December before pausing in the new year.
Meanwhile, the Fed still needs help from markets in tempering inflation running at 40-year highs — and the lack of communication could be playing a part, El-Erian’s imaginary chat suggests.
“We also noticed what you failed to say. You made no attempt to push back against our massive loosening of financial conditions in recent weeks. With that, we got an even brighter green light from you to loosen them even more,” the markets say.