Allianz chief economic adviser and noted economist Mohamed El-Erian has expressed concern over the market’s reaction to Federal Reserve Chair Jerome Powell’s speech on Wednesday where he said the central bank may slow the pace of rate hikes as soon as December while observing there is a long way to go in taming inflation.
El-Erian said the market’s reactions highlight the communication challenges that the central bank faces. “The more the Chair tilts his remarks dovish, the greater the loosening of financial conditions and, potentially, the bigger the risk to meeting the inflation objective,” El-Erian tweeted.
Today’s massive US market reactions to Jay Powell’s remarks highlight the communication challenge facing the Fed:
— Mohamed A. El-Erian (@elerianm) November 30, 2022
The more the Chair tilts his remarks dovish,the greater the loosening of financial conditions and, potentially, the bigger the risk to meeting the inflation objective pic.twitter.com/dx5Gsyh052
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Reacting to Powell’s indication that the pace of rate increases may be slowed soon, the Nasdaq closed over 4% higher while the Dow and S&P ended Wednesday over 2% higher. The SPDR S&P 500 ETF Trust SPY closed 3.14% higher on Wednesday while the Vanguard Total Bond Market Index Fund ETF BND closed 0.78% higher.
Repeated Warnings: This is not the first time that the noted economist has warned about the market’s reaction to Fed’s communication. In late October, El-Erian highlighted on Twitter how the markets were happily embracing the view that the central bank will slow its hiking cycle. “The resulting self-feeding loosening of financial conditions may not be what the #Fed wishes to see at this particular juncture,” he had said.
Photo by IMF on Flickr
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