Economist Mohamed El-Erian believes the Federal Reserve will raise interest rates this summer, despite what the markets think.
“The market is not fully priced for July, and the market is not priced for the possibility of a second hike coming later in the year,” said El-Erian, chief economic advisor for Allianz, on an interview with CNBC’s “Squawk Box” Monday.
According to the CME Group’s FedWatch tool, investors say the chance of a June hike is 26%, while they put the probability of a July raise at 53%.
For his part, El-Erian sees the Fed moving by September – most likely by July. The Federal Open Market Committee will likely hold off on raising rates until after the vote on Britain’s European Union membership, El-Erian said.
The economist adds that he expects the Fed to raise rates twice this year and perhaps once or twice next year. Also on Monday, San Francisco Fed President John Williams said that there could be two or three rate hikes in 2016, including one in June, according to a Reuters report.
“This is a Fed that is carrying the burden of all economic policies,” El-Erian explained. “They have a small window … to start normalizing [rates], and they intend to take advantage of it.”
In addition, he says the market “doesn’t realize that the Fed learns. Last year, they had a big window [to raise rates] same time last year. They missed it. So this year, with the dollar having weakened and the financial markets relatively stable, they want to take advantage of that.”
At its April meeting, some members of the Fed said they would support a plan to raise interest rates as early as June if economic growth improves in the second quarter. Other conditions they are looking for include stable improvement in the labor market and inflation close to the group’s 2% benchmark.
“The problem is not the Fed. The Fed knows it doesn’t have the right medicine for the economy,” El-Erian argued.
“What we need is to deal with structural impediments to growth,” he said. “That requires … political will, and we do not have it right now … At some point we have to hand off [from the central bankers, including the Fed] to what really does drive economic growth.”
— Check out Bill Gross, Mohamed El-Erian Warn Against Counting the Fed Out on ThinkAdvisor.