Why El-Erian Is Part Of 'Very Small Camp' Against Fed Slowing Down Rate Hike To 25 Bps

Allianz chief economic adviser and noted economist Mohamed El-Erian reportedly said he is among a small group of people who think the Federal Reserve should not downshift to 25 basis points and stick to a 50 bps rate hike.

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“The inflation dynamics themselves aren't very encouraging. Because what has happened is that inflation has moved from the goods sector to the services sector. That's much harder to contain. So, I am in the very very small camp who thinks they shouldn't downshift to 25 basis points. They should do 50. They should take advantage of this growth window we are in, they should take advantage of where the market is, and they should try to tighten financial conditions because I think that we still have an inflation issue,” he told CNBC.

Major Wall Street indices closed in the green on Monday as investors and traders began considering the possibility of a slowdown in the pace of the central bank’s rate hikes. A report in The Wall Street Journal indicated central bank officials are preparing to slow the rate hike pace for a second straight meeting in early February as more confidence emerges that inflation will cool further this year. Comments by Fed Governor Christopher Waller on Friday that indicated a favor toward a quarter percentage point rate hike at the next meeting boosted investor sentiments, according to CNBC.

As a result, the SPDR S&P 500 ETF Trust SPY closed 1.2% higher on Monday while the Invesco QQQ Trust Series 1 QQQ gained 2.22%.

On being asked about the rally in stocks and bonds this year, El-Erian highlighted three reasons responsible for the move.

“One is economic prospects have improved. Two, the market feels inflation is mostly behind us. Three, the Fed has signaled that is going to downshift to 25 basis points,” he said.

“I think the year we got to romance different outcomes with respect to growth, inflation and the Fed,” El-Erian added.

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Photo by IMF on Flickr