The Federal Reserve might be about to make a policy mistake, according to Mohamed El-Erian.
Skipping a rate hike “could potentially be the least desirable” of three options available to the central bank, the top economist said Monday.
Traders expect the Fed to hold borrowing rates Wednesday, then tighten in July.
Investors should brace for the Federal Reserve to potentially make a mistake when its June meeting concludes on Wednesday, according to Mohamed El-Erian.
The top economist warned that “skipping” an interest-rate hike “could potentially be the least desirable” of three options available to the central bank, in a Financial Times op-ed published Monday.
Most traders expect the Fed to hold borrowing costs at their current level Wednesday before tightening again by 25 basis points in July, according to CME Group’s Fedwatch tool.
That approach – backed by top policymakers including board member Christopher Waller – would allow the central bank to observe another six weeks of economic data before deciding whether to press ahead with or pause its war on inflation.
But former PIMCO co-CIO El-Erian slammed the idea of a skip, warning that it’s likely the Fed will learn little about how its efforts to tame soaring prices are faring between now and its next meeting, slated to start on July 25.
“An additional month of data is unlikely to significantly enhance the Fed’s understanding of the effects of a policy tool that acts with variable lags,” he wrote.
“Recent data favours a hike for a central bank that has repeatedly insisted that it is ‘data dependent’,” El-Erian said, likely referring to economic releases including May’s jobs report, which signaled that the US labor market remains red-hot despite the bank’s tightening efforts.
Rather than skipping a rate hike, the Fed should either raise borrowing costs again or signal that it’s pausing its tightening campaign while adopting a new inflation target of between 3% and 4%, El-Erian added.
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