El-Erian: Currency Movements Won't Change The Fed's Decision

With the dollar continuing to strengthen over other currencies and most of the regions across the globe facing economic uncertainty, the market is speculating whether the Federal Reserve will go ahead with its plans of raising rates this summer. However, renowned economist and Allianz chief economic adviser Mohamed El-Erian is confident that regardless of volatility in currency markets, the Fed will be raising rates. He was on CNBC to provide his perspective.

Related Link: Morgan Stanley CEO: Raising Rates Would Be Recognition That US Is Back On Track

Will The Fed Raise Rates This Summer?

“I think it [the Fed] is facing this uncertainty between a healing U.S. economy and a weakening global economy,” El-Erian said, “Let’s not forget there are also the geo-political factors.”

“I still think they’ll hike during the summers [sic.]. They’ll go very slowly. They’ll stop well below the 4 percent historic rate, but they have got to build in some cushion.”

“So, I think they’ll still go, but it reflects [back to] you this divergence that’s occurring in both economic performance and policy prospects,” he concluded.

Won’t Raising Rates Create Havoc?

With currency markets inevitably affected by the strengthening dollar, raising rates could cause trouble. El-Erian responded, “So, first on the currency: you have heard me say this for months, history tells you that whenever you get very sharp movements among the major currencies, something breaks. Okay, this has been the history over and over again.”

“In the past, it was emerging markets; this time it is corporations that are weaker and, importantly, it is adding to the volatility. And remember, the whole notion of the Fed is to repress market volatility. So, the currency movements are important, but they are not unexpected.”

“I don’t think that in itself changes the Fed. I think the Fed is going to look at that and say, 'You know what?' That’s part of their adjustment process.”