Fed May Be 'Bullied' Into 50 BPS Cut In September, Says Mohamed El-Erian, As Global Markets Melt Down

Stocks across the globe swooned on Monday, as the weakness seen late last week carried over, with some of the Asian markets already falling into correction territory. Economist Mohamed El Erian on Sunday weighed in on the implications of the market sell-off for the monetary policy.

What Happened: The implied probability of a 50-basis-point cut by the Federal Reserve in September has “suddenly surged from essentially de minimis to some 80%,” said El Erian in a post on X, formerly Twitter.

Traders were now increasing the size and speed of a Fed cutting cycle, he added. The futures market now sees a 95.5% probability of a 50-basis-point reduction in the Fed funds target rate from 5.25%-5.50% to 4.75%-5% and assigns a 4.5% probability for a 0.25% point reduction.

El-Erian doesn’t see the need for the steeper cut but sees it as a possibility. “It is certainly possible that, lacking the usual strategic anchors and guided by an outdated monetary policy framework, this (play-by-play) Fed may be bullied by markets into a 50 bps September cut,” he said. This could be similar to what the central bank did in the fourth quarter of 2018 when stock market volatility forced it into a “policy U-turn” that was not warranted by economic conditions, he added.

“Such an outcome would constitute a notable change in the Fed’s policy narrative, which would also need to be accompanied by significant revisions to their economic projections, El-Erian said.

See Also: Best Inflation Stocks

Why It’s Important: El-Erian’s comments come even as a section of the economists maintain that the Fed policy is too restrictive and that the central bank’s inflation fixation is based on lagging indicators.

Ark Invest’s Cathie Wood is among fund managers, who have called for the Fed to begin cutting rates with immediate effect or risk the economy falling into a recession. However, inflation truthers like Larry Summers have even said the Fed’s next move would be to the upside rather than the downside.

Read Next:

• What Investors Should Know About Yen Carry-Trade Unwinding That Is Sending Global Markets Into A Tailspin

Photo via Shutterstock.