Markets Realize Can’t Hold Fed Hostage: El-Erian

  • Economist Mohamed El-Erian said markets are starting to realize that inflation is not only cyclical.
  • Until Powell’s speech last week, he said the market was “holding the Fed hostage,” adding he wanted a change of course.
  • Stocks may need to fall further to fully price in the Fed’s reaffirmed hawkish stance.

The S&P 500 is starting to realize that inflation isn’t cyclical and is a sign that investors can’t pressure the Fed to make a dovish turn around mid-summer. It has fallen 7% since the rally, said top economist Mohammed El-Erian.

“There is no doubt that the market has held the Fed hostage for a long time,” El Elian said in an interview with CNBC on Friday.

Stocks rose briefly when the July CPI showed a slightly lower inflation rate of 8.5%, prompting Chairman Jerome Powell’s speech in Jackson Hole to say the Fed would not compromise its mandate to keep prices down. emphasized.

El-Erian said the Fed’s message appropriately deflated market optimism, largely because it sent a more consistent message to the market.

“All that consistency comes down to HFL: Higher for longer for long,” he said, referring to Chairman Powell’s statement on rate hikes in Jackson Hole. “The more Fed officials repeat it, the more the market will price in.”

El-Erian has been a strong critic of the Fed’s slow reaction to inflation, having previously warned that a July rally was premature. Economists have been more complementary to Powell and the Federal Reserve since Jackson Hole.

“What has fundamentally changed is inflation. At 8.5% inflation, the market suddenly loses its ability to hold the Fed hostage. I think the market is starting to realize that. “Inflation has fundamentally changed the equation,” he added.

But the recent plunge in stock prices doesn’t mean the market doesn’t yet have hope that the Fed will move away from its hawkish stance. Most of the slump has been concentrated in bond markets, and with the Fed eyeing a possible 75 basis point rate hike again in his September, other markets will need to fall as well, he said. El-Erian points out.

Economists think the Fed is on the right track, but the central bank also wants to explain to markets why its original inflation forecast was “so wrong” and to be transparent about how it forecasts for the future. He stressed the need to improve

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