Mohamed El-Erian has a cautionary word for anyone anticipating an end to interest-rate increases from the US Federal Reserve and other central banks.
“All of you who are looking for a pivot, be careful what you wish for,” the Allianz SE chief economic adviser and Gramercy Funds chairman said on Friday.
“This pivot only happens if you have an economic accident or a financial accident, and the journey to an economic accident or a financial accident is a very painful journey,” he said.
Photo: Bloomberg
The closely followed investor and strategist points to an upheaval in markets this past week, highlighted by the Bank of England intervening to stop a meltdown in gilts after a UK tax cut proposal, as a sign of economic fragility.
“This week has told us a lot about the transitions going on,” said El-Erian, who is also president of Queens’ College, Cambridge, and a Bloomberg Opinion columnist. “The next few weeks are going to be pretty volatile.”
More than a year ago, El-Erian said the Fed was lagging in its fight against the fastest inflation in decades, which appears to be prescient as the central bank began a rate-hike regime this year that shows no sign of stopping.
Financial markets from stocks to bonds to credit have dropped in value this year, and liquidity is shrinking to the point where the riskiest deals are now getting hung up.
“How do you reconcile the need to tighten monetary policy with the need to maintain financial stability?” El-Erian said. “That tension is playing out not just at the domestic level but the international level.”
The Bank of England was not the only central bank that has intervened in markets recently, as the Bank of Japan moved to shore up its currency against a soaring US dollar.
“These interventions, to be clear, are temporary,” El-Erian said. “It tells you that the global economy is not clearing on its own. If it is allowed to clear on its own, there’s going to be a lot of collateral damage.”
However, with global inflation proving to be persistent, the Fed and its peers likely have no choice but to stick with plans for rate increases, at least for now.
“There has to be more pain before we get to a world where central banks say we are changing our inflation target,” El-Erian said. “There is a justification for changing the inflation target, [but] the credibility blow would be significant.”
Meanwhile, Bank of America Corp strategists said that the Fed needs to slow the pace of rate hikes to prevent credit market dysfunction.
Distress, dispersion and debt-to-enterprise-value ratios were all above June highs, pushing the bank’s measure of credit stress to a “borderline critical zone” this week, strategists Oleg Melentyev and Eric Yu said.
A Fed slowdown and possible pause would “allow the economy to fully adjust to all the extreme tightening already implemented, but still working its way through the financial system’s plumbing,” they wrote in a note on Friday.
Failure to do so risks dysfunction that “would be difficult to contain and fix,” they added.
DAMAGE REPORT: Global central banks are assessing war-driven inflation risks as the law of unintended consequences careens around the world, spiking oil prices Central banks from Washington to London and from Jakarta to Taipei are about to make their first assessments of economic damage after more than two weeks of conflict between the US and Iran. Decisions this week encompassing every member of the G7 and eight of the world’s 10 most-traded currency jurisdictions are likely to confirm to investors that the specter of a new inflation shock is already worrying enough to prompt heightened caution. The US Federal Reserve is widely expected to do exactly what everyone anticipated weeks ahead of its March 17-18 policy gathering: hold rates steady. The narrative surrounding that
PRICE HIKES: The war in the Middle East would not significantly disrupt supply in the short term, but semiconductor companies are facing price surges for materials Taiwan’s semiconductor companies are not facing imminent supply disruptions of essential chemicals or raw materials due to the war in the Middle East, but surges in material costs loom large, industry association SEMI Taiwan said yesterday. The association’s comments came amid growing concerns that supplies of helium and other key raw materials used in semiconductor production could become a choke point after Qatar shut down its liquefied natural gas (LNG) production and helium output earlier this month due to the conflict. Qatar is the second-largest LNG supplier in the world and accounts for about 33 percent of global helium output. Helium is
About 1,000 participants, including more than 200 venture capitalists, joined the Taiwan Demo Day in Silicon Valley on Saturday, the largest iteration to date of the event held ahead of Nvidia Corp’s annual GPU Technology Conference which runs from today to Thursday. Taiwan Demo Day, co-organized by the Taiwan Next Foundation and the Startup Island Taiwan Silicon Valley Hub, took place at the Computer History Museum in California, showcasing 12 teams focused on physical artificial intelligence (AI) and agentic AI technologies. Katie Hsieh (謝凱婷), founder of the Taiwan Next Foundation, said the event highlighted the strength of the Taiwan-US start-up ecosystem, with
DOMESTIC COMPONENT: Huang identified several Taiwanese partners to be a key part of Nvidia’s Vera Rubin supply chain, including Asustek, Hon Hai and Wistron Nvidia Corp chief executive officer Jensen Huang (黃仁勳), addressing crowds at the company’s biggest annual event, unveiled a variety of new products while predicting that its flagship artificial intelligence (AI) processors would help generate US$1 trillion in sales through next year. During a two-and-a-half-hour keynote address, Huang announced plans to push deeper into central processing units (CPUs) — Intel Corp’s home turf — and introduced semiconductors made with technology acquired from start-up Groq Inc. The company even said it was developing chips for data centers in outer space. At the heart of Huang’s speech was the message that demand for computing power
RSS