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El-Erian: Too Early to Make Fed Rate Call for September

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Bloomberg Aug 18, 2023 12:33 · 6882 Views

"This is structurally a very different global economy and that's a problem," Mohamed El-Erian, a Bloomberg Opinion columnist, says. Speaking with Jonathan Ferro on "Bloomberg The Open," El-Erian also says the recent moves in equities and credit are a "giveback after months of excessive romance" with the soft landing narrative. El-Erian's opinions are his own.

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Transcript

  • 00:00 Are there structural reasons to make the argument
  • 00:02 the rates can be higher for longer than we have truly broken out of that pre pandemic post GFC
  • 00:09 regime that we were in for the best part of a decade?
  • 00:12 Oh, absolutely.
  • 00:13 And you've heard me say this, this is a different global economy.
  • 00:17 This is no longer an economy where aggregate demand is deficient.
  • 00:22 This is an economy where there's insufficient aggregate supply.
  • 00:26 We feel it in the labor market.
  • 00:28 We feel it in terms of the supply chains being rewired,
  • 00:32 we feel it in terms of the energy transition
  • 00:35 and the list goes on.
  • 00:36 So yes, this is structurally a very different global economy
  • 00:40 and that's a problem because the framework
  • 00:43 is directed at an economy with
  • 00:46 with insufficient aggregate demand.
  • 00:48 The inflation target, as you've heard me say, may be too low for this world.
  • 00:53 So yes, there's lots of reasons to argue that this is a fundamentally different economy,
  • 00:58 but it raises critical aspects in terms of monetary policy.
  • 01:02 Well, let's talk about the monetary policy call for September, which sounds boring compared to what we've just discussed.
  • 01:07 Is it too early to make a call as to what they may or may not do
  • 01:10 a month from now given we still have one more CPI report
  • 01:13 and another payrolls report around the corner?
  • 01:16 I think it is.
  • 01:17 They've told us over and over again that they are highly data dependent and we have to respect that.
  • 01:22 So we have to see what the jobs report and what the, what the CPI inflation report is going to say
  • 01:27 CPI September 13th for those following early September you get the payrolls report.
  • 01:31 Mohammed, if we can finish on the market, I think we should.
  • 01:34 Equities today are down about 1/2 of 1% off the highs of July by about 5% on the S&P 500 on the NASDAQ by a high yield spread still incredibly tight.
  • 01:44 What do you think explains that Mohammed, given the challenge we see developing in the bond market with rates of 5% of the front end
  • 01:51 close to 450 down the longer end of the curve just yesterday, isn't that a challenge to this risk appetite in equities, in credit?
  • 02:00 It is a challenge.
  • 02:01 But I think we have to put into context John.
  • 02:04 You know when we're talking back in July, there was a sense of the market overdoing the romance with the soft landing narrative
  • 02:11 and it went too far both on the
  • 02:13 bond side and on the equity side.
  • 02:16 So I see this as a give back
  • 02:19 after a month of excesses, excessive romance with the soft landing
  • 02:24 step back.
  • 02:25 John, if I had told you in the beginning of the year
  • 02:27 that the SNP would be up 14%,
  • 02:30 that the NASDAQ would be up 27%,
  • 02:33 I think you would have said most investors would have taken that.
  • 02:36 So I I you know it's important to keep a perspective on this.
  • 02:39 I think what you're seeing here is is people are realizing that it's not going to be as simple
  • 02:45 as the soft lending narrative that the market fell in love with
  • 02:48 back in July.