Benzinga - by Shanthi Rexaline, Benzinga Editor.
Federal Reserve Chair Jerome Powell was cheered by the market on Wednesday for acknowledging the possibility of a Fed funds rate cut this year. Economist Mohamed El-Erian shared his views on the near-term direction of interest rates.
What Happened: El-Erian stated in an interview with CNBC that he expects the Fed to implement two to three rate cuts this year, maintaining his previous stance on rate expectations. “That would be appropriate,” he said. “If we don’t see any cuts, which is increasingly concerning to the market, then the market is justified in worrying about economic growth and earnings. However, we should expect two to three cuts.”
The economist also discussed whether the Fed should consider global economic conditions when setting interest rates or focus solely on domestic issues. He highlighted China’s deflationary challenges and the risk of falling into the “middle-income trap.”
El-Erian suggested that China’s deflationary situation could benefit the U.S. economy, given its imports from China.
“But our reality is the reality of Europe, which is we no longer live in a world where there isn’t enough demand. We live in a world where supply is no longer flexible enough, and that has to do with lots of things and it’s not gonna go away,” El-Erian said.
“Governments aren’t doing enough to help the supply side and as a result of that….the last mile getting to 2% is really, really difficult and we’re starting to get a sense of that from the data.”
"We're going to see 2-3 cuts this year," says @elerianm. "If we don't get any cuts, which is increasingly what the market is worried about, then the market is correct to worry about economic growth and earnings." pic.twitter.com/CpxF1DPPFZ— Squawk Box (@SquawkCNBC) March 6, 2024
Why It Matters: El-Erian’s comments are significant as Powell has indicated a potential rate cut contingent on inflation reaching the 2% target.
JPMorgan‘s report from early February predicts inflation to remain above 2% unless a recession occurs next year. The firm’s Chief U.S. Economist Michael Feroli highlighted the importance of core goods inflation in moderating overall inflation but noted a less noticeable cooling in core services prices.
Given the ongoing discussions about inflation targets, some economists, including Nobel Prize-winning economist Paul Krugman, have advocated for raising the Fed’s inflation target to 3%, which could impact investor sentiment until resolved.
In the market, the iShares TIPS Bond ETF (NYSE:TIP), which tracks inflation-protected U.S. Treasury bonds, closed Wednesday’s session slightly up at $107.56, according to Benzinga Pro data.
Read Next: JPMorgan Analyst Warns of ‘1970s Stagflation’ As Inflation Stays Well Above Fed’s Target, With Jamie Dimon ‘Skeptical’ Of A Goldilocks Scenario
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