FX168 Financial News Agency (Europe): Mohamed El-Erian, chief economist at Allianz, has followed up on Fed Chairman Powell's "hawkish-dove" stance, calling for the Fed to consider a rate cut in July, but delaying it may cause greater economic risks. He stressed that people live in an uncertain world.
He told American CNBC that if the PCE inflation data released this Friday are favorable, the Fed should "definitely consider" a rate cut. Nevertheless, he emphasized: "I don't think the Fed is going to cut rates."
He went on to say: "We live in an uncertain world."
(Source: Bezinga)
He pointed out that there is a discrepancy in inflation dynamics, and that the pace of economic slowdown is faster than expected, which indicates that the central bank should consider cutting interest rates earlier and faster.
El-Erian warned that the Fed should not be too cautious, as this may further weigh on economic growth. He emphasized that a misjudgment by the Fed of the labor market could pose potential risks that could further hinder economic growth.
Earlier, Federal Reserve Board of Governors member Michelle Bowman said on Tuesday that it was too early to lower policy rates and that if inflation worsened, she was prepared to support further rate increases.
El-Erian called for interest rate cuts, consistent with his previous warnings of the economic risks of delaying rate cuts by the Fed.
In a recent commentary, he emphasized that the Fed needs to act quickly to lower interest rates to prevent potential economic instability.
Meanwhile, US Treasury Secretary Yellen is confident about the US economy, ruled out the possibility of an economic recession, and predicted that inflation rates will reach the Fed's target of 2% next year. This contrasts sharply with El-Erian's concerns about the speed of inflation and its potential impact on the economy.
El-Erian's stance also echoes that of Federal Reserve Board of Governors member Lisa Cook, who recently suggested that the Fed cut interest rates, although she did not specify when.
However, former US Treasury Secretary Larry Summers criticized the Fed's optimistic stance on inflation, warning that the Fed underestimated the long-term interest rates needed to curb inflation.
El-Erian previously wrote in a Financial Times article: "It's not important when the Fed starts reducing rates, what's really important is when it ends", which is a widely held view on Wall Street.
"At first glance, this suggestion is a timely warning for many market participants who are currently obsessed with whether the Fed will begin a rate cutting cycle in September, with the support of the latest inflation data, or whether it will wait a while longer, as several Fed officials suggested last week."
However, this view overlooks the importance of the timing of the first rate cut. In the current situation, the timing of the rate cut is crucial for determining the cumulative amplitude of the cycle and the economic health.
The commonly held argument about timing is that the first rate cut can allow the market to more confidently price the entire rate cutting cycle. Given the data-dependent Fed today, this seems less important, as the Fed has avoided taking a strategic perspective and unfortunately is unlikely to change this approach in the short term.
The lack of policy anchoring has deprived the fixed income market of its important leadership. The performance of US Treasury yields reflects this, whether it is the policy-sensitive 2-year bond or the 10-year bond, the latter reflecting the market's view of the entire rate cycle and the implications for inflation and growth.
Timing is related to economic conditions, and although not yet widespread, more and more data suggests that the economy is weakening, including deteriorating leading indicators. At the same time, the balance sheets of small businesses and low-income households holding assets and liabilities have also been significantly reduced. As the lag effects of the large-scale rate-hiking cycle in 2022-23 gradually appear, these vulnerabilities may intensify, and at the same time, there will be significant cyclical fluctuations in technology, sustainable energy, supply chain management, and trade.
(Source: Financial Times)
Historical perspectives also indicate that timely rate cuts can improve economic outcomes. As Bob Michele of JPMorgan emphasized in a Bloomberg TV interview last week, rapid rate cuts played an important role in achieving a "soft landing" after a 300 basis point rate-hiking cycle in 1994-95, which is rare in history. This historical precedent should inspire optimism and indicate that timely rate cuts may bring similar positive results in the current economic situation.