- Mohamed El-Erian believes that the Fed and the financial markets are not listening to each other’s signals.
- So the top economist wrote a chat between the two to highlight the missed messages and risks.
- He believes markets are focused on the news they want to hear, not the Fed’s warnings.
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Financial markets and the Federal Reserve just don’t listen to what they’re saying, Mohamed El-Erian believes – so he imagined the two talking like an old married couple to show what’s missing.
Allianz’s chief economic adviser published a hypothetical conversation between Fed Chair Jerome Powell and markets in a Bloomberg opinion piece on Thursday. He paints investors fixated on the good news, not the Fed’s warnings – and that’s not good for the health of the US and global economy, he believes.
In the chat, Powell asks, “Did you hear EVERYTHING I said at the Brookings Institution on Wednesday?”
Markets are reacting: “The main thing we’ve heard is that you’re definitely going to slow down the rate hikes that start as early as this month!”
You have said in no uncertain terms that “the time to slow the pace of rate hikes could come as early as the December meeting”. That’s dynamite!”
Powell signaled Brookings that the Fed could slow the pace of rate hikes later this month. His comments sparked a sharp rebound in US stocks on Wednesday, with the Nasdaq Composite gaining 4%.
But the Fed’s messages just don’t get through to markets when they only hear the good news – and that’s not good for the health of the US and global economy, Mohamed El-Erian believes.
He pointed out that markets have turned a deaf ear to Powell’s warnings that the Fed has more ground to fight inflation and its caution about not easing monetary policy too soon.
The US Federal Reserve has been raising interest rates at the fastest pace in history to fight decades of inflation plaguing the US economy. The key interest rate has been raised four times in a row by 75 basis points and markets are expecting officials to come up with a 50 basis point hike in December before pausing in the new year.
Meanwhile, the Fed still needs help from the markets to dampen inflation, which is at 40-year highs – and the lack of communication could play a part, as El-Erian’s imaginary babble suggests.
“We also noticed what you didn’t say. They have made no attempt to resist our massive easing of financial conditions over the past few weeks. That gave us even more of the green light from you to ease them even further,” the markets say.