As Bond Yields And Dollar Fall, Top Economist El-Erian Says Fed May Not Want 'Self-Feeding Loosening Of Financial Conditions'

U.S. bond markets rallied on Wednesday, with the yield on the 10-year benchmark Treasuries falling close to 4%, as expectations regarding a less aggressive Federal Reserve began growing. The greenback, too, lost steam as the dollar index fell below the 110 mark.

However, Allianz chief economic adviser and noted economist Mohamed El-Erian said the Federal Reserve would not be happy with the resulting financial conditions.

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What Happened: “Government bond yields and the #dollar continue to fall in the run-up to the US market open — both in response to #markets happily embracing the view that the #FederalReserve will slow its hiking cycle … and whose price impact now extends well beyond #stocks,” El-Erian said on Twitter.

“The resulting self-feeding loosening of financial conditions may not be what the #Fed wishes to see at this particular juncture."

Stocks and bonds have been hammered by the Fed's aggressive moves and policy projections this year. The SPDR S&P 500 ETF Trust SPY has lost over 20% so far in 2022, while the Vanguard Total Bond Market Index Fund ETF BND has shed over 16%.

Financial Stability: The central bank is expected to be less hawkish in the future, although a 75 basis points rate hike has been factored in by market participants.

“[Paul] Volcker dealt with growth and inflation. [Fed] Chair Powell has on top of that financial stability,” El-Erian told Bloomberg Television on Tuesday. 

In case the central bank pivots away from its present hawkish policy, “it will be because of financial stability. It’s not going to be because they’ve decided to not look at inflation anymore,” he said.

El-Erian said earlier this month that the central bank made "two big mistakes that may go down in the history books." 

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Photo courtesy: International Monetary Fund on Flickr