Mohamed El-Erian: Hoping the Fed delivers two rate cuts starting July

Well, joining us now, Mohamed El Erian is Chief economic advisor at Allianz and President of Queen’s College at Cambridge University. It’s great to have you here, Mohamed. Wonderful year. Thanks for having me. We see the market sort of unclenching a little bit. I mean, obviously part of Friday’s declines seem to be anticipation of what might happen in terms of this anticipated attack that did come to fruition, but then of course doesn’t seem to to necessarily be carrying through to anime today’s market action. So what are we left? With bond yields going back toward their highs of last week, we’re repricing what the Fed might do. We’ve had to digest these hotter than expected inflation numbers. What’s the thing you’re most focused on? So first, I think it’s fascinating that the market has concluded a fact and a hypothesis. The fact is that the damage over the weekend was contained. The hypothesis is that there will be no further escalation. That is very different from what the national security people are telling you and us in terms of we’ve crossed a new line, it’s a new Middle East. So I think the market is willing to put that aside and be comforted by three things. One is that we will continue to see productivity enhancing innovations advance. 2 is that the Fed at the end of the day will be accommodating 2 markets. And three is that soft landing is the most likely baseline. And it’s a good thing for the marketplace in the short term to be have those three things. But we should listen to the national security people because I do think things have changed in the Middle East. You mentioned those three things. They certainly are underlying the premise of where the markets have gotten to this year. Now of course, I’m looking at the SP 500. It’s only picking up a third of what was lost on Friday. We are still a few percent below our highs. It seems as if the outlook has become a little bit less clean, at least even from a macro perspective given the way people are wondering if the Fed is going to kind of get get itself into a corner here and not get through the easing that it wants to. So we’ve been pricing in something that we’ve discussed for a while and and that that I’ve I have felt for a while is that inflation is going to prove sticky, that the last mile is really complicated and that we’re not sure what the Feds reaction function is. If the Fed remains data dependent, then the Fed will be more hawkish than it needs to be and that the market expects it to be. If, however, the Fed looks forward, and to use Steve Liesman’s phrase, embraces more of an inflation framework and model, then it will deliver on the two cuts this year. So the marketplace is having to price in this reality that inflation is sticky, but I’m still unclear where you are. So I am hoping that the Fed will be less data dependent. I am hoping that they will look forward, realize that the economy is weakening and deliver on two cuts starting as early as July. That is what I’m hoping. But then if the Fed does do those two cuts and inflation has been stickier and does come back with a vengeance, wouldn’t that be kind of, wouldn’t people blame the Fed for acting too prematurely? Is that in their minds at all? So the key issue you’ve said come back with the vengeance. So my, my macro model, my macro paradigm is we are living in a world of insufficiently flexible supply side, very different from the world we lived in after the global financial crisis where there was enough demand that insufficiently flexible supply calls for a slightly higher inflation target. the Fed cannot declare a high inflation target because it missed so long and by so much. So what we’re going to do is we’re going to see this phrase longer term come in before they talk about the inflation target and we will settle at an inflation at around 3% and I suspect it is stable, I suspect it doesn’t the anchor inflation expectation. So the other bit of your of your thing that inflation comes roaring back our 70s, that doesn’t happen. Well, I mean it is worth reminding folks that you know first of all PCE inflation is their target, it’s under 3, it’s probably going to stay under three. They only think it should get to 2.6 by the end of the year from 28 let’s say in order for them to get those cuts in. The other thing is, through the span of history, inflation ±2 and a half, 3% is not necessarily a big impediment, right, to the economy or to the markets. That’s absolutely right. And I would add to that, 2% is totally arbitrary target, right? We only have 2% because back in 1991, the Bank of New Zealand adopted 2%, right? That’s why we have 2%. So yes, all that. You’re absolutely right, Mike.