Mohamed El-Erian, chief economic advisor at Allianz, said early Thursday that he thinks the Federal Reserve likely will raise rates in September.
“I do I think that’s the most probable,” El-Erian stated during an interview on Bloomberg TV. “It speaks to the theme of divergence in monetary policy, which itself speaks of three things: a multi-speed global economy, different exposure to exogenous factors and finally …. [the fact that] some countries are using monetary policy as a currency policy.”
In addition to laying out the global context for a probable Fed rate hike, he also noted specific U.S.-based reasons for such a move.
“For a while, the U.S. was willing to stand on the sidelines and let the dollar appreciate,” El-Erian explained. When the dollar got to about $1.05 vs. the euro, though, “sentiment changed as U.S. companies began reporting difficulties” due to the dollar’s appreciation.
“The U.S. does not wish to be the only game in town when it comes to currency appreciation,” the economist added. “We have signs … that we are no longer in the paradigm where you get uncontrolled U.S. currency appreciation.”
In terms of the timing of a rate hike, and whether a rise by U.S. central bankers would be too soon or too late, El-Erain stated, “If they move in September, they will be balanced in their risk.”
The case for such a move, he explained, stems from the pickup in the U.S. economy, the lack of any signs of inflation, and concerns “about excessive risk taking,” he says. Plus, the Fed is “worried about the misallocation of resources, because interest rates have been repressed for so long.”
By the time we get the hike, El-Erian adds, the Fed “would have done its utmost to shift our focus away from the first rate hike and onto the journey. It’s going to be a very gradual journey, stop-go, very shallow path, and a terminal point well below the average.”
In other words, it won’t be the usual experience of rate hikes. “In sum, it will be the loosest tightening in the modern history of central banking,” the economist said.
— Check out El-Erian: American Dream Is Under Threat on ThinkAdvisor.