Zinger Key Points
- El-Erian believes Fed is excessively data dependent and said the central bank needs to be anchored by some strategic view of the economy.
- The economist opined the Fed will hike the policy rate in May following which it will go for a pause.
- El-Erian said he does not expect inflation to come down quickly.
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Allianz chief economic adviser and noted economist Mohamed El-Erian believes the Federal Reserve is excessively data dependent and said the central bank needs to have a longer term vision and be anchored by some strategic view of the economy.
What Happened: "Of course, it’s a gamble. But without that even cash management becomes really hard. Just again look at the volatility in the two-year (treasury yield)," he told Bloomberg TV.
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The economist opined that the Fed will hike the policy rate in May, following which it will go for a pause. He argued the real question then would be whether it is an "anchored Fed strategically" or it continues to be a "flip-flopping Fed."
And I hope that this Fed gets anchored," he added.
El-Erian explained the supply side is not as elastic as it used to be because of political issues, transition issues and because companies are looking for more resilience. "So, if you are anchored by that view, you will take a different approach to interest rates. The Fed is not anchored by this view as yet," he noted.
Inflation: Interestingly, two Federal Reserve officials on Thursday reiterated the need for more interest rate hikes to rein in inflation just as the central bank is set to enter a silent period from April 22 to May 4, ahead of its next monetary policy announcement.
While Philadelphia Fed President Patrick Harker said the apex institution will have to do more on the policy front to get inflation back to the 2% target, Cleveland Fed President Loretta Mester stated monetary policy will need to move further into restrictive territory this year to put price rises on a sustained downward trajectory.
El-Erian stated he's not sure what the central bank's longer term view is but said he does not expect inflation to come down quickly. "I do not see interest rate going down quickly but those who simply extrapolate the past argue that this will happen," he said.
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