07/07/2022
Mohammed Al-Arian.

  • Economist Mohamed El-Erian told Bloomberg that taking “pause” steps by the Federal Reserve to raise interest rates would be a major political mistake.
  • The idea of ​​a “Fed Pause” has been circulating 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 posted its longest streak of weekly declines in two decades, in part because investors raised hopes that the Federal Reserve could ease interest rate hikes amid fresh economic data – but the central bank’s “precautionary” measures will do something important, he said. The famous economist, Mohamed El-Erian, told Bloomberg, it is a political mistake for the world’s largest economy.

The Federal Open Market Committee is due to meet later this month with signs that US inflation is easing. Among them, the core indicator of personal consumption spending – the Fed’s preferred measure of inflation – rose to 4.9% in April, down from 5.2% in March. Stocks rose on Friday after the report, confirming investors’ hopes that the Federal Reserve may not be too hawkish about raising interest rates.

In a job interview, Ariane told Bloomberg, policy makers are raising interest rates in a slowing economy just as they should have started rising nine months ago to prepare the economy for a so-called soft landing, or slowing activity that avoids a recession. 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 adviser said. “I think the Fed will have to choose between two policy mistakes: slamming on the brakes too hard and risking a recession, Or slam on the brakes…and risk inflation to 2023.”

The latest CPI report for April showed a headline reading of 8.3%, down from 8.5% in March, but inflation remains at a 40-year high. Gross domestic product shrank 1.5% in the first quarter, worse than the Commerce Department’s original estimate.

The S&P 500 endured an eight-week streak of declines this week, the longest streak of losses since 2001. Gains were partly stimulated minutes after the March meeting of the Federal Open Market Committee.

They said the rapid change in interest rates would leave the FOMC “in a good position later this year to assess the impact of tighter monetary policy and the justification of economic developments for a policy adjustment”.

El-Erian said a pause in the Fed’s rate-raising cycle in September would be an example of the central bank moving into a pause pattern. Goldman Sachs said this week that a sell-off in equities could find a bottom if the Fed signals its willingness to end monetary tightening, and the idea of ​​a “Fed Pause” has been floated by other voices on Wall Street.

This week, global equity funds saw their biggest inflows in 10 weeks and a “summer bull run.” [is] Bank of America said on Friday. Bond tracker EPFR said US equity funds have seen the biggest inflows since the second week of March. Vanda Research said this week that retail investors have bought into the stock market slowdown despite a 32 percent drop in the value of their portfolios.

“It is clear that there are those who are negotiating and there is bargaining in one name,” Al-Arian said. He said that the bullish technical reaction to the weekly series of losses is understandable.

“What I don’t understand is the idea that the Fed will suddenly be able to go up twice and then take it slow and pause. The only reason, as I said, is a collapse in demand. And if demand collapses, the stocks will not do well.”

He pointed to the decline in stocks over the past week after the retail heavyweight Target lost its quarterly earnings forecast as inflationary pressures helped shrink earnings by 52%.

“[Target] They declared that they will not only be affected on the cost side but also on the revenue side due to high inflation. “And the last thing this stock market needs right now is more concern about earnings.”

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