El-Erian Says Fed Lost Credibility With Markets, US Public


(Bloomberg) — Mohamed El-Erian, a closely watched bond market strategist, says the Federal Reserve has a confidence problem with the financial markets and the nation because of inflation.

“It has a credibility problem with the American people, which is why Chairman (Jerome) Powell chose to address the American people at the beginning of his press conference,” the chairman of Gramercy Fund Management and former CEO of Pimco said on Friday. Bloomberg Television’s The Open. “It has become more and more of a problem with the market.”

Bloomberg Opinion columnist El-Erian added that “it is essential that the Fed regain its credibility. It won’t do that until it does what the ECB did last week, tell us why inflation forecasts have been so wrong for so long and how to improve inflation methodology.”

In July, El-Erian predicted that inflation, which was 5.4% annualized at the time, would not be as transient as the central bank predicted. Overall inflation in the US, as measured by the consumer price index, is now at 8.5%.

His criticism on Friday also affected Powell, who said on Wednesday that a 75 basis point increase is not “actively” considered. The Fed has kept interest rates as low as zero since 2020 in response to the shutdowns in the economy that took place when the pandemic broke out.

“You can’t go on TV and talk about all the uncertainties and then rule out a particular policy response — 75 basis points,” El-Erian said. “We don’t know enough about the path of inflation at this point to rule out certain policy actions.”

Financial market turbulence has intensified since the Fed meeting, with stocks falling sharply and 10-year Treasury yields remaining above 3%, a level visited this week for the first time since 2018.

“The mess we see in the market is about liquidity,” El-Erian said. “I am willing to stick my neck out and say that we have largely priced in the interest rate risk. We have not priced liquidity risk, we have not priced credit risk, we have not priced market forces risk. We are still working on pricing. The days of abundant and predictable liquidity are over.”

©2022 Bloomberg LP

Source link


Please enter your comment!
Please enter your name here