In a critical week for US stocks, Fed Chairman Jerome Powell has an opportunity to get investors on board with the Fed’s agenda to reduce inflation, which is likely to hurt economic growth. in the short term, argued renowned economist Mohamed El Erian.
In particular, speaking to CNBC yesterday, Allianz’s chief financial advisor said that J. Powell has a chance to address the “disconnect” between Wall Street and the central bank over its monetary policy in his speech at the end of the week at the Fed’s symposium in Jackson Hole, Wyoming.
“Chairman Powell has two choices: either he’s going to let this disconnect continue, or he’s going to try to fix it. And if he tries to fix it, he’s either going to defy the market’s expectations, or he’s going to admit that the market is right because he’s going to we have a significant economic slowdown. It’s up to him,” said M. El Erian.
Powell is scheduled to speak Friday at an economic symposium hosted by the Federal Reserve Bank of Kansas City.
US stocks have surged over the summer in what most analysts see as a bear market rally that began when many investors interpreted statements by J. Powell that he had signaled that the Fed would move to limit rate hikes as US economic activity slows.
However, the Fed is quite likely to go ahead with its third consecutive mammoth rate hike of 75 basis points (0.75%) in September to curb spiraling inflation.
It is characteristic that bets on the bank’s interest rate futures now show a 56.5% chance of a 75 basis point increase. against 43.5% of a milder one of 50 m.p.
Powell “should avoid what I call spurious precision,” El-Erian said.
“I think forward guidance has really been devalued under the current Fed. What he should be coming out and saying is, ‘I’m going to do everything I can to put the inflation genie back in the bottle, which is critical to the long-term economic prosperity,” he added.
According to Mohamed El-Erian, the Fed chairman should recognize that such a stance on inflation may lead to a much weaker economy, but that aggressive moves will benefit the economy in the long run. “The other, fairy-tale finances don’t help anyone,” he said characteristically.
The US “has the potential to avoid a major recession if we get policy right,” he added.
Allianz’s chief economic adviser also commented on the dichotomy emerging between bank CEOs and their analysts over recession risks, as each camp looks at the country’s economic activity in a different light.
“I think if it was just the rest of the world, the cries for a recession would be everywhere. Europe looks crap and further gas price hikes aren’t going to help much. China is clearly struggling,” he said. “So we get these incredible and disjointed messages from the institutions themselves, because they have different views about the US.”
Source: Capital
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