El-Erian Says He Couldn't Remember A Time When Markets Were 'So Dismissive' Of Fed's Forward Guidance

Allianz chief economic adviser and noted economist Mohamed El-Erian believes he couldn't remember a time when markets were so dismissive of the Federal Reserve's forward guidance.

What Happened: El-Erian noted that the divergence between the central bank's stated 2023 interest-rate trajectory and market expectations has been as wide as a full percentage point recently. The economist made this observation in his article published on Project Syndicate.

"That is a remarkably large gap for the central bank at the center of the global financial system," he said.

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Financial Stability: El-Erian also believes the Federal Reserve's loss of credibility directly affects the central bank's ability to maintain financial stability and guide markets in a manner consistent with its dual mandate.

"I personally cannot recall a time when so many former Fed officials have been so critical of the institution's economic projections, which in turn inform the design and implementation of its monetary policy," El-Erian noted.

It is worth noting that the recent production cut announcement by OPEC+ has become the latest headache for the Fed as it tries to rein in inflation while simultaneously attempting to resolve the banking crisis. According to the CME FedWatch Tool, the market is considering close to 55% probability of a 25 basis points rate hike in the next FOMC meet.

El-Erian cited a CEPR research that said market volatility was three times higher during press conferences held by Fed Chair Jerome Powell compared to those held by his predecessors, and they tend to reverse the market's initial reactions to the Committee statements.

"At this point, there is no denying that the world's most powerful central bank has slipped in its analysis, forecasts, policymaking, and communication. That is the bad news," El-Erian stated.

Structural Problems: The economist detailed two structural problems that the Fed needs to address. One, he said, is that the central bank's decision-makers appear to lack the viewpoint diversity and comprehensive expertise found in other major central banks.

"They would do well to follow the Bank of England's example and add two independent external voting members to the Fed's policymaking committee," he said.

The second problem is about basic accountability, El-Erian noted, while pointing out that even though the Fed chair appear before Congress twice a year, the hearings are not conducive to focusing on what really matters.

"The process needs another layer of due diligence, with specialists in the field also reporting to Congress ahead of regularly scheduled testimony," El-Erian said.

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