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- Fed being ‘held hostage’ by markets - Mohamed El-Erian
Fed being ‘held hostage’ by markets - Mohamed El-Erian
The Federal Reserve is being “held hostage by markets” and will be forced to make two interest rate cuts before the end of the year, according to Mohamed El-Erian, the chief economic adviser to Allianz.
El-Erian said the Fed will “have no choice” but to drop rates to as low as 1.75% over the next five months to alleviate fears that trade tensions and slowing global growth will hurt the US economy.
“Even though further cuts are not justified by traditional economic metrics, the Fed will have no choice but to reduce rates. The markets are holding them hostage right now,” said El-Erian.
“The cuts will be made for negative reasons, not positive ones. The Fed is afraid of the market’s reaction if it doesn’t act,” he said.
The US central bank reduced rates last month for the first time in 11 years, cutting them by 25 basis points.
El-Erian said: “This is not yet the start of a long series of cuts. We are not looking at six or seven straight reductions. The US economy is still in a good place, and for a recession to happen over the next 12 months would require either a policy mistake or a big market accident.”
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