July 19, 2019 – In an Op-Ed posted on Bloomberg today, former CEO of PIMCO Mohamed El-Erian expressed concerns on market expectations that the U.S. Federal Reserve will embark on rate cuts imminently, and in particular, a 50 basis point rate cut at its next meeting. He said:

I’m all for central banks doing their utmost to support high, durable and inclusive growth. But this doesn’t mean throwing everything at the wall when the economy is doing relatively well, financial markets are buoyant, and policy ammunition is limited. Growing pressure on the Federal Reserve to cut interest rates by 50 basis points this month is unwarranted. By complying, the Fed would serve the short-term interests of financial asset holders at the risk of greater difficulties down the road.

Market players have viewed expectations of rate cuts as a game of chicken between the market and the Federal Reserve. While U.S. economic growth has somewhat tapered, unemployment remains low. Studies have indicated that consumer confidence remains near historic highs.

A respected economist BuyMuni spoke with pointed to the low/negative rate environment in Europe as anecdotal evidence of what the U.S. may wish to avoid from a policy standpoint, but he noted with irony that ECB policy has also been a source of significant pressure for the Federal Reserve as higher interest rates in the U.S. continue to attract foreign inflows, perhaps supporting the dollar at un-competitive levels.

Mr. El-Erian opined that a 50 basis point cut in July could “threaten the country’s economic well-being”, nothing the following:

No matter how much and how often financial markets get what they wish for, they always ask for more. 

Contact Caren Moses at CMoses@BuyMuni.com.