The Federal Reserve could be about to make a big mistake, top economist Mohamed El-Erian said Monday. Shannon Stapleton/Reuters According to Mohamed El-Erian, the Federal Reserve is about to make a policy mistake. Skipping a rate hike “might be the least desirable” of three options available to the central bank, the top economist said Monday. Traders expect the Fed to hold lending rates on Wednesday and then tighten in July.
According to Mohamed El-Erian, investors should brace themselves for a possible mistake by the Federal Reserve at the close of its June meeting on Wednesday.
The top economist warned that “skipping” a rate hike could be “possibly the least desirable” of three options available to the central bank, in a Financial Times op-ed published Monday.
According to the CME Group’s Fedwatch tool, most traders expect the Fed to hold borrowing costs at their current levels on Wednesday before tightening again by 25 basis points in July.
That approach — backed by leading policymakers, including board member Christopher Waller — would allow the central bank to observe another six weeks of economic data before deciding whether to continue or pause its war on inflation.
But former PIMCO co-CIO El-Erian denounced the idea of a skip, warning that the Fed is likely to learn little about how its efforts to curb rising prices between now and the next meeting, scheduled to begin on June 25 July.
“An additional month of data is unlikely to significantly improve the Fed’s understanding of the effects of a variable-lag policy tool,” he wrote.
“Recent data favors a raise for a central bank that has repeatedly urged it to be ‘data-dependent,’” El-Erian said, likely citing economic releases including May’s jobs report, which indicated the US job market remains red-hot despite the tightening of the bank.
Rather than skipping a rate hike, the Fed should raise borrowing costs again or signal that it is pausing its tightening campaign while setting a new inflation target of between 3% and 4%, El-Erian added.
Read more: Top economist David Rosenberg scoffs at calls for the Fed to raise interest rates again after the number of job openings soared
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