The Fed’s pause in raising interest rates could be a major political mistake: El-Erian

• Economist Mohamed El-Erian told Bloomberg that a “pause” move by the Federal Reserve in raising interest rates would be a major political mistake.
• The idea of ​​a “Fed Pause” has gained a foothold among stock investors in recent weeks.
• He said the best investors could hope for was a “soft” landing for the US economy.

The US stock market snapped its longest streak of weekly declines in two decades in part as investors stuck to their hopes

Federal Reserve

Renowned economist Mohamed El-Erian told Bloomberg that raising interest rates may dampen price hikes in the face of new economic data – but “pause” moves by the central bank would be a major political mistake for the world’s largest economy.

The Federal Open Market Committee will enter its meeting later this month with indications that inflation in the US is slowing. Among them, the core personal consumption expenditures index – the Fed’s preferred measure of inflation – rose to 4.9% in April, down from March’s reading of 5.2%. Stocks rose on Friday after the report, highlighting investor hopes that the Federal Reserve may not be so aggressive in raising interest rates.

Policymakers are tightening prices in a slowing economy when they should have started rising nine months ago to put the economy in a position to allow for a so-called soft landing, or slowdown in activity that avoids

Recession

Al-Arian told Bloomberg in an interview on Friday.

“So the best you can hope for now is a soft landing. What is the probability of that happening? Not as high as I would like,” the Allianz advisor said. “I think the Fed will have to make a decision between two policy mistakes: squeezing too hard and risking a recession or slamming on the brakes…and risking inflation to 2023.”

The latest report on consumer price inflation for April produced a headline reading of 8.3%, down from 8.5% in March, but inflation remained stuck near 40-year highs. Gross domestic product shrank 1.5% in the first quarter, worse than initially estimated by the Commerce Department.

The S&P 500 this week snapped an eight-week streak of declines, the longest losing streak since 2001. Gains were partly catalyzed by minutes from the March Federal Open Market Committee meeting.

They said a quick move on interest rates would leave the FOMC “in a good position later this year to assess the effects of policy stability and the justification of economic developments for a policy adjustment.”

El-Erian said that the Federal Reserve’s halting of its interest rate raising cycle in September would be an example of the central bank’s move into a halt pattern. Goldman Sachs said this week that a sell-off in equities could bottom if the Fed signaled its willingness to halt monetary tightening, and that the idea of ​​a “Fed Pause” was held up by other voices on Wall Street.

This week, global equity funds saw their biggest inflows in 10 weeks and a “summer rally wagon” [is] Bank of America said on Friday the bond tracker fund EPFR said US equity funds saw their biggest inflows since the second week of March. Individual investors were buying into a lower stock market despite a 32% drop in the value of their portfolios, Vanda Research said this week.

“It is clear that there are those who are looking for deals and there are deals under one name,” El-Erian said. He said the bullish technical reaction to a series of weekly losses is understandable.

“What I don’t understand is the notion that the Fed would be able to go up twice and then take it easy and pause. The only reason, as I said earlier, is if demand collapses. And if demand collapses, stocks won’t do well.”

He pointed to the slump in stocks last week after retail heavyweight Target lost its quarterly earnings forecast as inflationary pressures slashed its earnings by 52%.

“[Target] He declared that they were affected not only on the cost side but also on the revenue side due to high inflation. “The last thing the stock market needs right now is more earnings concerns,” he added.