El-Erian says US policy threatens Fed rate cuts

El-Erian says US policy threatens Fed rate cuts

The chances of a Federal Reserve interest rate cut in September are dimmed by The threat of an inflationary policy shock after the US elections, according to Mohamed El-Erian.

“There are two factors that make a September rate cut difficult for this Fed,” El-Erian, president of Queens’ College, Cambridge, told Bloomberg Television on Friday. “One is that they can get a negative data point. The second problem is politics. How worried are you about an inflationary shock after the election due to the policies?

The Bloomberg Opinion columnist believes the United States is not destined to experience a “Liz Truss moment,” when the British prime minister’s budget plans disrupted markets two years ago, sinking government bonds and the pound. But the Fed’s “biggest fear,” he said, is having to reverse course in a next cycle of interest rate cuts and raise borrowing costs again as inflation accelerates again.

In the low-probability scenario that the Fed raises rates next year, El-Erian added, it will be because of a major external shock or “because policies in other areas – fiscal, trade have fundamentally changed”.

El-Erian spoke after the release of Friday’s data showing that U.S. producer prices rose more than expected in June, with final demand up 0.2% month-on-month. He also spoke a day after a separate, more closely watched measure of consumer inflation came in weaker than expected for June. Thursday’s CPI report reinforced bets that the Fed will ease monetary policy as soon as September as inflation nears the central bank’s 2% target.

“The Fed will keep this question open,” El-Erian said. “They will continue to say that 2% is our target, that we will get there when we get there. That’s the way to set slightly higher inflation targets without them calling it that.”.