Mohamed El-Erian Attributes Biggest Monthly Financial Loosening To 'Market Romance' And Anticipation Of Soft Landing

Expectations of an economic slowdown sufficient to warrant interest rate cuts next year have triggered a significant shift in the market, according to economist Mohamed El-Erian.

What Happened: El-Erian described the current situation as a “market romance” with the idea of a “soft-ish of soft landings.” However, he warned that this sentiment might have been overstated, Business Insider reported.

Despite the Federal Reserve not yet reducing the benchmark rates, other borrowing cost indicators have recently seen significant drops, spurred by the hopeful anticipation of monetary policy easing in the coming year.

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For instance, the 10-year Treasury yield, which hit 5% in late October, plummeted to below 4.3% just a month later. The rate-cut optimism also resulted in a surge in stocks, with all three indices rallying heavily throughout November. The S&P 500, in particular, jumped approximately 9%.

However, El-Erian cautioned that despite the loosening of financial conditions, the Fed continues to warn investors that a shift to rate cuts may be premature. He also noted that while a 2024 slowdown is likely, the market’s pricing in of rate cuts suggests an imminent crisis.

“I wouldn’t go as far as the market to price in a 50% probability of a March cut and five cuts next year unless you believe we’re going into recession,” El-Erian stated.

Barclays also predicted a cautious approach from the Fed, projecting it to limit interest rate cuts to approximately 100 basis points next year due to ongoing economic strength.

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