(Boursier.com) — Another call for caution from a recognized specialist in the world of finance. Markets are overestimating the pace and magnitude of the Federal Reserve’s interest rate cuts because they are overlooking stubbornly high inflation, says economist Mohamed El-Erian. “I think we’re getting to the pivot, but relative to what the market expects, it won’t be as fast or as deep,” said Mr. El-Erian, president of Queens’ College, Cambridge and a Bloomberg columnist. Opinion’. “I wouldn’t be surprised if we started later, probably early summer, and I wouldn’t be surprised if we ended the year with cuts closer to what the Fed reported, which is 75 basis points , contrary to what the market has integrated,” added the former boss of PIMCO.
Markets are underestimating inflation in the services sector, which remains higher than that of goods and will have to fall much more quickly, Mr. El-Erian stressed at a UBS Global Wealth Management conference in Hong Kong. 10-year Treasury yields could end the year closer to 4.5% than 3.5%, the executive also said in response to a question at the conference, while US GDP growth could reach around 1% to 2% as the economy normalizes.
The market is currently pricing in monetary easing of around 140 basis points this year, down from the recent peak of around 175 basis points, but still significantly above the Fed’s guidance. This small revision of traders’ expectations is linked to the latest statements from Christopher Waller who pushed back aggressive rate cuts this week, and to data on retail sales in the United States that was higher than expected.
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