There’s a key piece of evidence in the bond-market surge that followed the latest US central-bank meeting, according to Mohamed El-Erian: The Federal Reserve has a communication problem.
Nearly a week after policymakers left interest rates on hold and unveiled projections for more cuts than previously expected in 2024, traders and Fed officials are still at odds over the path for policy, said El-Erian, the president of Queens’ College, Cambridge, and a Bloomberg Opinion columnist.
“The whole point of Fed communication is to do two things: One is to be transparent, and two is to enhance the power of forward policy guidance,” he said Tuesday on Bloomberg Television. “Instead, Fed communication confuses people. I think we have a real problem.”
Treasury yields began their recent plunge last Wednesday as investors saw the clearest evidence yet that a monetary pivot is imminent.
The move has since extended, and swaps markets now expect nearly six quarter-point interest rate cuts from the Fed next year — even as a string of Fed officials push back against what they see as overly-dovish market expectations.
In El-Erian’s view, such a back-and-forth reveals a misstep on behalf of the Fed, and a dynamic in which the market is calling the shots rather than the central bank.
“The market is absolutely correct in trying to do two things. First is trying to bully the Fed because this Fed seems to be willing to be bullied. And second to get carried away with this notion that the Fed put is back,” he said.
The impact of traders piling into dovish bets and boosting bonds in the aftermath of the Fed’s December meeting will be far-reaching, El-Erian said, and stand in the way of efforts to combat “the last mile” of inflation.
“The fact that you start a show on Tuesday talking about a meeting from last Wednesday is an indication of how absurd this whole thing is,” he said.
This article was provided by Bloomberg News.