According to El-Erian, the Fed is currently captive to data dependency but warned that the problem with the approach is that the data is backward-looking.
Allianz Chief Economic Advisor Mohamed El-Erian on Wednesday batted for a September rate cut, citing a weak labour market.
“Every indicator suggested [that the] labor market is weaker and the risk is it weakens at an accelerated fashion, and if that happened, it is very difficult to come back quickly,” El-Erian said in an interview with Fox News.
While acknowledging that the July producer price inflation was hotter-than-expected, the economist said corporate earnings showed that companies were absorbing the increased cost, which in turn had hit their margins.
Also, Japanese data showed that exporters to the U.S. are taking a hit as well, he said, adding that the pass-through is not as high as many people expect.
The economist expects inflation to remain stable at the 2.5%-3% rate. “If the Federal Reserve were to decide on a target today as opposed to being a hostage to a target from the old days, it would be in the 2.5%-3% range,” he said, adding, “That is stable inflation for an economy going through structural change.”
The market, which rose to record highs earlier this month on rate cut expectations, has given back some ground since then. The Invesco QQQ Trust (QQQ), an exchange-traded fund (ETF) that tracks the Nasdaq 100 Index, and the SPDR S&P 500 ETF (SPY) are still up 11% and 9.53%, respectively, for the year-to-date period.
El-Erian also defended his earlier call for the resignation of the Fed Chair Jerome Powell. “The longer he stays there, the more he attracts attacks on the institution, the greater the attacks, the greater the risk to its independence,” he said.
“Don’t underestimate the role of the Chair: People would describe the Fed as ‘Chair-centric,’ meaning the chair has enormous influence on decisions.”
President Donald Trump has been taking up cudgels against Powell for his intransigent stance concerning the Fed funds rate. As recently as Tuesday, he took a jibe at the Fed chair for being “Too Late” with rate cuts, blaming the latter for the housing market’s malaise. “People can’t get a Mortgage because of him. There is no Inflation, and every sign is pointing to a major Rate Cut. ‘Too Late’ is a disaster!” the president said.
El-Erian also noted that people generally prefer not to go against the chair, given that the Fed lacks external members, which also makes it susceptible to groupthink.
According to El-Erian, the Fed is currently captive to data dependency, but warned that the problem with the approach is that the data is backward-looking.
The economist said his view that the Fed should have cut rates in July is an economic argument and not a political argument.
He also delved into the possibility of a 50 basis point (bps) cut at the September meeting. Last July, the central bank said it wouldn’t cut rates but dropped them by 50 bps at the September 2024 meeting, he said.
El-Erian said the 50 bps cut would happen again with another weak employment report. “If we get another weak employment report, then it’s not flashing a yellow light; it’s flashing a red light about the jobs market and the Fed needs to act, and act decisively,” he said.
For updates and corrections, email newsroom[at]stocktwits[dot]com.<