Mohamed El-Erian says that the guessing game that’s taking place over the Federal Reserve’s path for monetary policy is creating market volatility.
US bonds have sharply sold off following a strong September jobs report that led traders to rapidly dial back bets on aggressive Fed interest-rate cuts ahead after the central bank cut rates by a half-point last month. The declines since Friday has pushed the yield on benchmark two- and 10-year Treasury notes above 4% for the first time since August. Swaps traders are now pricing just an 80% chance the Fed cuts rates by just a quarter-point at its November meeting.
“Markets are all over the place. In the last 15 days the probability of a 50 basis point cut in November has gone from over 60% to zero. November is next month,” El-Erian, the president of Queens’ College, Cambridge, told Bloomberg Television on Tuesday.
“That is how much uncertainty there has been in this market. These are massive moves based on data points,” he added.
Both inflation and employment data will drive the Fed’s decision making, according to El-Erian. Traders will have another key data point to digest on Thursday when the Bureau of Labor Statistics releases September’s consumer price index report. US price growth pressures are seen moderating, but any surprise could upend markets yet again buffeted by varying labor and inflation readings.
“This market lacks anchors when it comes to how it sees the interest rates,” said El-Erian, also a Bloomberg Opinion columnist. “Until we restore some sort of anchor you’re going to have this volatility.”
El-Erian added that Fed communication since 2021 has “amplified” market volatility even though policy guidance is supposed to do the opposite. “We are living in this strange regime,” he said.
This article was provided by Bloomberg News.