Mohamed El-Erian expects the Federal Reserve to deliver just one interest-rate cut this year, in contrast to what the market and the central bank are projecting.
Markets are fully pricing in at least two rate reductions in 2025 — plus a high likelihood of a third. In all, they see about 70 basis points of easing this year, with the first quarter-point cut in July.
Meanwhile, the central bank’s latest dot plot calls for only two cuts.
The Fed is “inherently dovish,” the Queens’ College, Cambridge president told Bloomberg TV Wednesday, adding that he worries when the central bank dismisses soft economic data and calls the upcoming tariffs transitory before actually knowing the details of such levies and how countries will respond.
The market is too optimistic that new tariffs will result in a “Thatcher-Reagan moment where we go through disturbances, we rewire the economies and we come out with a streamlined government, better debt dynamics and an able private sector with major innovations” plus “a fairer trading system,” he said.
In order for that best case scenario to play out U.S. President Donald Trump needs to deliver some clarity on universal tariffs, regulation and public sector reform, the Bloomberg Opinion columnist said.
Trump is expected to unveil sweeping tariff measures on trading partners after market close Wednesday on what he has dubbed “Liberation Day.”
El-Erian said he expects Trump’s tariff plans will necessitate multiple rounds of negotiations.
While markets have priced in uncertainty they haven’t priced in the 50% chance that the president’s tariffs will result in stagflation “that paralyzes policymakers,” he added. “And it takes a major slowdown in order for the policy stance to respond.”
(Image: Bloomberg)
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