Mohamed El-Erian: Deep Fed divisions show lack of a ‘strategic view’

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01. So, let's continue that conversation with Mohamed El-Erian this morning, chief economic advisor at Allianz, who I'm sure has been listening in. Mohamed, happy Friday. It's good to see you. Do you think this wave of unleashed data can be definitive? No. Um you have deep divisions, and you heard [snorts]

02. Steve say that you're likely to get three dissents if they don't cut, four or five dissents if they do cut. These are deep divisions getting deeper. They're getting deeper for three good reasons and one awful reasons. The good reasons is that there's pressure on both sides of the mandate. And there's there's complexity about the employment side.

03. Is it cyclical? Is it structural? Is it supply? Is it demand? The second reason is the aversion is different among Fed officials. Some of I have greater aversion to inflation. Some have greater aversion to the employment side. And the third that we haven't talked about is that GDP and employment are decoupling, making it even more complicated.

04. But the awful reason, and that's why the data isn't going to sort it out, is that this is a Fed that lacks a strategic view. It doesn't have clarity as to are we on the cusp of a productivity boom that allows us to run monetary policy hotter than we would otherwise, or are we not? And that makes a huge difference.

05. And for the marketplace, the narrative has changed from something very comforting. We're going to get cuts despite a solid economy to now we may not get cuts despite a weakening labor market. So, it's it's a huge change in the top-down narrative that amplifies the bottom-up. And I am dying to see, Carl, whether we get the buying on dips that has been so reliable for so long.

06. Right. I wondered if I mean, depending on how equities trade and whether these dips get bought, Mohamed, are you beginning to think about the impact of a wealth effect on the high-end spend that might eventually say or push the doves to say we win? Um no. I I I think the wealth effect isn't as powerful as we tend to think it is.

07. And we saw that clearly during the era of QE where the wealth effect should have kicked in and QE should have had a positive benefit on the economy that's material, and it didn't. So, no. I I don't worry about the wealth effect as much as I worry about the technicals that that we're seeing it today, that people step back from all markets, and you no longer get the risk mitigation properties that are so important to asset allocation.

08. That's what I'm worried about. So, I I'm focused very much on the technicals and whether this once again the buying on the dip conditioning works, or alternatively we see a repeat of what we saw in earlier periods where there is no risk mitigator for investors. What would you be advocating for if you were on the Fed, Mohamed?

09. I would cut, and I would have started cutting in July. And for the simple reason that I do believe we are on the cusp of a major productivity boom. I do believe that monetary policy can be looser than it would have been otherwise. And I worry that we may inadvertently delay or even derail um a a growth spurt because we're not paying enough attention to the sectors that you talked about.

10. Um so, that's why I am worried. Sa- Sarah, I think the sectors that you talked about that benefit from a rate cut Yes. are important in this case share economy. Me, too. But what about the argument, you know, that Steve made that that the aggregate economy is doing pretty well if you look across, you know, markets, economy, and that the Fed should just stand pat and see see which one is the bigger risk to materialize.

11. It feels like that's where they want to go. So, Chair Powell put it well when they say there is no risk-free path, and that's just a reflection of what hasn't happened already. Um if the Fed had been more timely, we may be in a different position, but it is what it is. So, yes, there are risks on both sides.

12. So, I always ask the question, which is a more recoverable mistake if we end up making a mistake? Hopefully, we will not end up making a mistake. So, look at the inflation side. For the hawks, they'll tell you that 60% of the components of the CPI are 3% or above. I would say to them, look at inflation expectations.

13. Yep. Believe now that despite the 2% target, we're living in a stable 2 and 1/2 or 3% inflation world, and do you really want to sacrifice the productivity and growth um outlook? That That's where I would end up. Mohamed, we'll see what we get in the coming days. It's going to be really important to watch. Have a good weekend. Thanks.