The alternative—a pivot caused by a sudden economic or market accident (or both)—is not conducive to buying assets ahead of a policy change. It would be a similar situation if inflation were to come down because the Fed tipped the U.S. economy into a damaging recession.
Last week is not the first time some market participants have suddenly foreseen an early change in Fed tightening policy. It is, however, notable that they did so with no hint whatsoever from central bank officials.
I suspect that it was years of prior Fed conditioning, together with insufficient appreciation of the underlying structural changes, that made keen and inherently optimistic investors jump back into what turned out to be yet another ill-fated—and, this time, very brief—pivot romance. It is a reminder that conviction without sufficient foundation can often prove problematic as an investment approach.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. A former chief executive officer of Pimco, he is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE; and chair of Gramercy Fund Management. He is author of The Only Game in Town.
This article was provided by Bloomberg News.