The U.S. Federal Reserve is being “held hostage by markets” and will be forced to make two interest rate cuts before the end of the current year, said veteran bond investor Mohamed El-Erian on Wednesday.
In an exclusive interview with Financial News, the chief economic adviser to Allianz, said the Fed will “have no choice” but to cut rates to as low as 1.75 percent over the next five months to alleviate fears that trade tensions and slowing global growth will hurt the U.S. economy.
“Even though further cuts are not justified by traditional economic metrics, the Fed will have no choice but to reduce rates. The markets are holding them hostage right now,” said El-Erian, the former co-chief investment officer at Pimco, the bond house.
“The cuts will be made for negative reasons, not positive ones. The Fed is afraid of the market’s reaction if it doesn’t act,” he said.
The U.S. central bank reduced rates last month for the first time in 11 years, cutting them by 25 basis points. At the time, Donald Trump criticised Jay Powell, the Fed chair, over the size of the reduction, calling on the central bank to make bigger cuts to enable the dollar to fall in value against foreign currencies.
“As usual, Powell let us down,” Trump tweeted. “What the market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China.”
El-Erian, who was elected as president of Queens’ College at Cambridge university in May, does not believe this is likely. He said: “This is not yet the start of a long series of cuts. We are not looking at six or seven straight reductions. The U.S. economy is still in a good place, and for a recession to happen over the next 12 months would require either a policy mistake or a big market accident.”
Source: Financial News
