The persistent discord between the Fed’s policy signals and investors’ interest-rate expectations is unusual and unsettling, Mohamed El-Erian said. It could lead to a surge in market volatility or end up eroding the central bank’s credibility, the top economist said on Twitter. Money-market prices reflect expectations for lower borrowing costs by year-end, but the Fed hasn’t signaled any rate cuts. Loading Something is loading.
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The ongoing discord between the Federal Reserve’s policy signals and financial-market expectations is unusual, and could end up sparking a bout of market volatility or eroding the central bank’s credibility, according to top economist Mohamed El-Erian.
The Fed has been persistent in its war against inflation, and raised interest rates for the 10th time in a row this month. While officials have signaled a possible pause in rate hikes, they haven’t suggested that outright cuts are on the way.
El-Erian is concerned that financial markets are not responding to that signaling – as money-market prices show investors are factoring in lower rates by year-end.
“The persistent gap between what the Federal Reserve has repeatedly signaled on policy rates and what the markets keep on pricing in is unusual given that the Fed sets the policy rates,” El-Erian said in a tweet on Wednesday.
“It is also unsettling as its resolution will involve either a bout of market volatility or further erosion of Fed credibility,” he added.
The chief economic adviser at Allianz has repeatedly criticized the central bank for reacting too slowly to the 2021-2022 inflation surge, and then scrambling to contain price pressures later through aggressive monetary tightening. The Fed has boosted benchmark rates from near-zero last March to upward of 5% today.
El-Erian has previously raised doubts about remarks made by Fed chair Jerome Powell and said his comments may get added to a list of central-bank communications that ended up undermining the institution’s credibility.
The top economist has also recently broke down what he thought the Fed should talk about to curb volatility in the current economic environment that is marked by stubborn inflation, banking instability, and high interest rates.