El-Erian warns of ‘cost of living crisis,’ says Fed rate hikes could cause recession
According to Mohamed El-Erian, economist, the Federal Reserve’s attempts to combat inflation could lead to the U.S. sinking into recession.
Markets now anticipate that the Fed will be even more aggressive following the decision by the U.S. central banks to raise interest rates earlier in the month.
Current pricing suggests a half-percentage-point hike in May and a cumulative boost of 2.5 percentage points to benchmark rates through the end of the year, from the near-zero level where they started 2022.
El-Erian is chief economist advisor at Allianz. He also serves as president of Queens’ College in Cambridge.
El-Erian said that the bond market thinks inflation is too high and that the Fed is far behind the curve. The Fed could… push the economy into recession while it attempts to catch up.Squawk BoxInterview on Monday Morning
Be aware of the curves
Some market indicators indicate that there are increasing risks of recessions.
Many shorter-term yields of government bonds are rising faster than those with longer maturities. This historically indicates that investors fear economic growth is slowing. In Monday trading, for example, the 3-year Treasury bond was ahead of the 30-year bond and the 10-year note.
The relationship between the 30-day and 10-year notes is a better indicator. This yield curve, however, shows that they are very different. Last week, there was a spread of 1.93 percentage point between the yields. That margin implied that only a very small probability of recession within the next year.
El-Erian stated that consumers would be facing inflation over the next few months. Inflation will be controlled by the Fed through rate increases that may limit economic growth.
We are looking at the cost of living crisis. This is the scenario we will be studying for the next quarters or three quarters. Inflation and lower consumer sentiment are going to hit the consumer hard,” he stated.
El-Erian pointed out that U.S. stocks are holding up well, as investors have few options.
Signs of economic growth ahead
The Fed will be releasing a series of data points over the next week to help us understand how fast we need to change.
This Tuesday’s Job Openings and Labor Turnover Survey will offer insight into the labor market. According to the previous month’s report, there was a difference of approximately 4.8 millions between unemployed workers and job openings.
The Commerce Department will publish the Fed’s preferred inflation gauge on Thursday. It is the core personal consumption expenses price index. This is forecast to indicate a 12.month increase of 5.5% for February. That’s higher than the 5.2% in the month before and far ahead of the Fed’s goal of 2%.
Next Friday’s nonfarm payrolls report will show an expected 5.5% 12 month increase in average hourly earnings. Economists are concerned about a wage price spiral, which could lead to an increase in inflation of 7.9% per year. This is the highest rate for 40 years.
The higher prices have not been as much of a problem for consumers who are rich from the pandemic-related stimulus programmes. El-Erian warned that higher interest rates and inflation will eventually take their toll.
The corporate sector is able to price. Because demand remains strong, it has pricing power. We’ll be capable of passing through higher costs,” he stated. We are going through difficult periods where cost of living will be a major concern.