2023-05-19 10:58:00
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Investing.com – The continued divergence between Federal Reserve policy signals and financial markets’ expectations is unusual, and might end up adding more volatility to markets or eroding the Fed’s credibility, according to Allianz Chief Economist (TADAWUL:8040) Mohamed El-Erian.
The Federal Reserve continued its fight once morest inflation, raising interest rates for the 10th consecutive time this month. While officials have signaled a possible pause in rate hikes, they have not indicated that any outright cuts are on the way.
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El-Erian is concerned that financial markets are not responding to this signal – money market rates show investors are pricing in lower rates by the end of the year.
“The persistent gap between what the Fed has repeatedly indicated regarding interest rates and what markets keep pricing is unusual, given that the Fed decides rates,” El-Erian said in a tweet on Wednesday.
“It’s also concerning because his decision will involve either more market volatility or further erosion of the Fed’s credibility,” he added.
Allianz’s chief economic adviser repeatedly criticized the central bank for its slow response to rising inflation from 2021-2022, and then scrambled to contain price pressures later through aggressive monetary tightening.
The markets are now baffled between expectations of moving to record levels and expectations of a halt in the rise in a changing macroeconomic environment.
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El-Erian’s recommendations
The economist, Mohamed El-Erian, explained earlier that the US Federal Reserve must take three measures in order to reduce the tensions in the economic environment, which is characterized by high inflation and banking fluctuations, in addition to high interest rates.
In this context, the economic analyst recommended in this regard the importance of the US Federal Reserve acknowledging that there is evidence supporting the weakness of the US economy and the decline in the labor market, even in light of the positive set of data.
However, El-Erian reported that inflation is not yet under sufficient control, not only due to flat core inflation but due to the recent rise in inflationary expectations.
The second matter requires, according to Mohamed El-Erian’s point of view, the need for the US Federal Reserve to address the recent strikes in the US banking sector, adding that the risks related to more bankruptcies have not yet been extinguished.
Moreover, the US Fed should make it clear that increased credit risk will exacerbate the volatility of the banking system, which has been mainly associated with US interest rate risks.
It is also important for the US Federal Reserve to note that what is happening does not mean that the banking system as a whole is facing a severe crisis. The strikes do not target the largest US banks, as these crises hit smaller and regional companies.
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