El-Erian Sees Fed Having Three Primary Options For Interest Rates Ahead, Believes None Is Optimal - Inves
According to sources, Mohamed El-Erian, who is a well-known economist and the chief economic adviser at Allianz, stated that the Federal Reserve has three choices when it comes to interest rates, but none of them are ideal.
El-Erian shared in an opinion article that was published in the Financial Times that there are two problems with the assumption that the central bank will not raise interest rates this time, but instead begin to tighten them in July.
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El-Erian stated that it is unlikely that one more month of data will greatly improve the Federal Reserve's comprehension of a policy tool that functions with varying delays. He furthered his argument by noting that recent data supports hiking interest rates, which aligns with the central bank's emphasis on being reliant on current information. Consequently, El-Erian expressed little surprise about some of the other Federal Reserve officials supporting an interest rate hike this week.
The stock market on Wall Street has shown positivity towards the possibility of a June policy break. The CME FedWatch Tool has indicated that traders are considering an 81.5% chance that the Fed will maintain its current situation. As reported by Benzinga Pro, the SPDR S&P 500 ETF Trust SPY saw a 0.91% increase in its closure on Friday, and the Invesco QQQ Trust Series 1 QQQ experienced a rise of 1.69%.
El-Erian stated that if the CPI inflation report coming out on Tuesday doesn't show any major problems, a decision to overlook it would make future decisions even harder.
El-Erian suggested that if the central bank truly prioritizes using accurate information to make decisions and is fully dedicated to reaching its current objective of maintaining a 2% inflation rate, then it should increase interest rates by 0.25% and remain open to the possibility of future increases.
According to him, if the Fed thinks that its inflation goal is no longer relevant due to major transformations in the economy's supply side, and updating the objective will take time and care, then the Fed should consider taking a break and leaning towards reducing rates when necessary.
He stated that implementing this strategy would give the previous interest rate increases time to spread throughout the economy, without risking negative consequences for economic growth or financial instability.
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