By contrast, U.S. economic readings have been more encouraging. The jobless claim number released last week was the lowest in more than 50 years, providing further evidence of a healthy labor market underpinning consumption. And the bounce back in monthly retail sales has eased many concerns about a major economic slowdown notwithstanding slowing manufacturing. But good news for the U.S. economy entails a tricky policy challenge for the Fed.
The minutes of the last Open-Market Committee meeting confirmed that the Fed’s policy U-turn was influenced by concern that U.S. growth and inflation outlooks would be undermined by spillovers from weaker international conditions and volatile financial markets, as well as trade tensions. Especially with the brighter prospects for a China-U.S. trade deal over the next few weeks, and with the stabilization of the Chinese economy, these concerns have been eased considerably, opening up the possibility of Fed-induced volatility as central bankers try to guide later this year toward a less accommodating monetary policy than what’s priced into markets.
All of this to say that, without a better liquidity-to-fundamental handoff and a more market-savvy Fed, the prospects for a melt-up scenario could well dim through the year.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. His books include “The Only Game in Town” and “When Markets Collide.”