Allianz chief economic adviser Mohamed El-Erian believes the effect of the Federal Reserve’s rate hikes is showing up in rate-sensitive sectors of the economy. However, the challenge is that drivers of inflation have shifted, he said.
“There is now ample evidence that the rate-sensitive sectors of the #economy, such as housing ... are feeling the #Fed's rate hikes...and they are dis-inflating. The challenge is that the drivers of #inflation have shifted to services which are less rate sensitive,” he tweeted.
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The noted economist also cited a chart that shows a decline in existing home sales which fell to a 2-1/2 year low in November as higher mortgage rates started taking a toll on the housing market. Existing home sales declined 7.7% to a seasonally adjusted annual rate of 4.09 million units last month, hitting the lowest level since May 2020, reported Reuters citing the National Association of Realtors.
El-Erian believes inflation is going to remain sticky and stated that when it reaches 4%, there’s going to be a major decision to be made by society on what the next steps would be.
The pessimism surrounding rate hikes and recession has been so persistent that the year-end "Santa Claus" rally has still not materialized. U.S. markets witnessed another sell-off on Thursday as traders began worrying about an impending recession. Major Wall Street indices closed over 1% lower on Thursday. The SPDR S&P 500 ETF Trust SPY closed 1.43% lower while the Vanguard Total Bond Market Index Fund ETF BND closed flat.
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