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By 
February 14, 2024 at 04:28 PM
What You Need to Know
- Hotter-than-expected inflation data served as a "wake-up call" for markets overly optimistic about Federal Reserve interest rate cuts.
- Mohamed El-Erian predicts no more than three Fed cuts this year, with the cycle possibly starting in June, contrary to market expectations of earlier and more cuts.
- The adjustment of market expectations, or a Fed mistake, could threaten what El-Erian calls an exceptionally strong economy.
The market got a “wake-up call” with the hotter-than-expected inflation data released this week after being “carried away” with its expectations for Federal Reserve interest rate cuts, economist Mohamed El-Erian said Wednesday.
“We’re not going to get more than three cuts this year, and we’re probably not going to start this cutting cycle until June,” the Allianz chief economic advisor said on CNBC’s “Squawk Box.”
“The market had gotten carried away. And yesterday, a relatively small miss in numbers that are very sensitive to seasonal adjustment created this outsized reaction.
“And it just shows you the extent to which the market had gotten carried away without much critical thinking about a very soft landing, many cuts starting early. This was, I think, just a wake-up call to people who got carried away,” El-Erian said.
Late last year, the marketplace embraced “a totally unrealistic path for Fed cuts,” he explained. Fed officials signaled three rate cuts, but “the market, for some reason, embraced six to seven.”
There’s a risk that the marketplace’s adjustment to new expectations “may pull the rug from underneath what is an exceptionally strong economy and one we should be proud of,” El-Erian said.
The economist said that he sees a risk of less than than 50% for a recession and that U.S. economic growth should be enough to continue boosting the market.
