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October 24, 2022 at 05:07 PM
What You Need to Know
- The market has redefined 'pivot' from cutting interest rates to slowing increases, El-Erian suggested.
- If the Fed does slow, it will be from concern over financial stability, not because inflation has turned around, he said.
- An ex-Fed official said the Fed will keep rates high until inflation comes down closer to its 2% target.
The current U.S. stock market rally may signal that investors have redefined what it would mean for the Federal Reserve to “pivot” when it comes to raising interest rates, essentially lowering their expectations, economist Mohamed El-Erian suggested Monday.
“I think what’s happening to our market, and it’s wonderful to have the best week since June, it’s wonderful to see the rally continue, is that we’ve redefined what a pivot is,” the Allianz chief economic advisor said on CNBC.
“We’ve redefined it from meaning lower rates, to pausing, to slowing. And if you redefine that, then you will have a liquidity effect, and that’s what we’re getting. We’re getting a liquidity effect rather than a fundamental effect,” he explained.
“And there’s reason for that because there’s significant value in certain parts of the market, so yes, you just need a catalyst,” El-Erian added.
If the Fed does slow rate hikes soon, it will be out of concern over financial stability, not because inflation has turned around, as the Consumer Price Index has continued to rise, he said.
“There’s concern that this front-loading of rate hikes, and it’s massively front-loaded, will break something in the financial system,” El-Erian said.
