‘Fed pause’ in rate hikes would be a major policy mistake: El-Erian

  • Fed’s ‘stop-and-go’ move on rate hikes would be a major policy mistake, economists say Mohamed El-Erian told Bloomberg.
  • The concept of a “Fed Pause” has taken hold among stock investors in recent weeks.
  • The best that investors can hope for is a “soft landing” for the U.S. economy, he said.

U.S. stocks snapped their longest weekly loss in two decades, in part as investors pinned their hopes on

US Federal Reserve

Rate hikes could ease in the face of new economic data – but a central bank’s “stop-and-go” move would be a major policy mistake for the world’s largest economy, noted economist Mohamed El-Erian told Bloomberg.

The Federal Open Market Committee meets later this month amid signs that U.S. inflation is cooling. in, Core Personal Consumption Expenditure Index – The Fed’s preferred measure of inflation – rose to 4.9% in April, down from 5.2% in March. Stocks rose on Friday after the report, underscoring investors’ hopes that the Federal Reserve might be less hawkish on raising interest rates.

Policy makers are tightening interest rates in response to a slowing economy, when they were supposed to start raising them nine months ago to put the economy in a so-called soft landing or slowdown in economic activity.

economic recession

El-Erian told Bloomberg in an interview on Friday.

“So the best you can hope for right now is a soft landing. How likely is that to happen? Not as high as I would like,” said the Allianz consultant. “I think the Fed will have to decide between two policy mistakes: hitting the brakes too hard and risking a recession, or hitting the brakes in a stop-and-go way…and the risk of inflation through 2023.”

The latest consumer price inflation report for April produced The headline read rate was 8.3%, That was down from 8.5% in March, but inflation remained near a 40-year high.gross domestic product 1.5% contraction in the first quarterworse than the Commerce Department initially estimated.

This S&P 500 This week ended an eight-week losing streak, the longest losing streak since 2001.Part of the reason for the rise is FOMC March meeting.

A quick rate change would put the FOMC “later in the year in a good position to assess the impact of policy tightening and the extent to which economic developments warrant policy adjustments,” they said.

El-Erian said the Fed’s halt in its rate-hike cycle in September would be an example of a central bank’s stop-and-go model. Goldman Sachs says This week said the sell-off in stocks could bottom if the Federal Reserve says it is ready to stop tightening monetary policy, and The idea of ​​a ‘Fed pause’ Other voices on Wall Street have been holding back.

Global equity funds experience biggest inflows in 10 weeks and ‘summer rally’ this week [is] growth,” Bank of America said on Friday. U.S. equity funds experienced their biggest inflows since the second week of March, bond tracker EPFR said. Retail investors Buy the downturn in the stock market That’s despite a 32% drop in their portfolio value, Vanda Research said this week.

“Obviously there are people who are looking for bargains, and there are single-name bargains,” El-Erian said. The upside technical reaction to the weekly decline was understandable, he said.

“What I don’t understand is that the Fed is suddenly able to raise rates twice, then ease and pause. As I said before, the only reason that happens is demand collapses. If demand collapses, the stock market doesn’t do well.”

He pointed to the stock market slide last week after retail giant Target missed its quarterly profit forecast as inflation pressures caused its profit to tumble 52%.

“[Target] He announced that because of high inflation, they are not only affected on the cost side, but also on the revenue side,” he said. “The last thing the stock market needs right now is further concern about earnings.