Mohamed El-Erian talks risks of Fed waiting too long to cut interest rates

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Fed가 금리 인하를 너무 늦게 할 위험이 크다고 주장. 연준 점도표의 매파적 신호를 시장이 무시하는 중이며, 35% 확률로 연준이 늦을 것으로 봄. 노동시장·기업 수요 약화 신호가 있고 저소득층·중소기업 완충력이 소진되어 경기가 가속 둔화될 위험. AI는 장기적으로 생산성 향상 도구로 긍정적이나 단기 인플레이션 속도제한은 남음.

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01. but first we have to talk about today's big story and that is inflation and the FED producer prices seen their biggest decline since October this coming after consumer prices cooled more than economists had expected in the latest report yesterday on Wednesday still the FED remaining cautious only forecasting One Rate cut this year when asked asked about the risks of waiting to cut rates here is what Fed chair J poell had to say we understand that if we wait too long that could come at the cost of economic activity of employment of the expansion we understand that if we move too too quickly we could end up undoing a lot of the good that we've done and have to then start over and it could be very disruptive so we we're extremely aware of both both of those risks joining us now we want to bring in Muhammad alaran he is Alan's a chief economic advisor as well as our very own Julie Heyman here joining the conversation as well Muhammad it's great to see you and thanks so much for taking the time to join us I want to start with what we just heard that thought that we just played sound bite that we just played here from Fed chair J pal he's saying that the FED is acutely aware of the risks here to both sides saying that the FED once again reiterating remaining data dependent I'm curious though of that downside risk of the FED waiting too long what exactly do you think that could look like and the odds of that actually happening at this point so I think CH pal is correct in pointing out that there are two taals to the soft Landing the soft Landing is what he's targeting um but there are risks on both sides I think what he misses is the balance of that risk that the balance unfortunately is in favor of them being too late and the economy slowing more than it should and small businesses and low-income household being hit particularly hard you ask what is that probability I put it at 35% there's a 35% probability that they may end up too late now the good news it's not above 50 but it's a pretty fat tale that the FED should be very very attentive to U Mohammad it's Julie here it's great to see you so at this point when is too late do we have a decent idea of the timing of of when the FED should begin cutting and when it actually is likely to begin cutting so in my opinion too late is what is with reflected in yesterday's SCP or do lot which is the possibility of one hike unless remember four people said no hikes and if this is the normal Fed hiking cycle that one hike would come in December so that in my opinion would be too late by that time the lagged effects of what was a significant increase in rates would be biting even more already the cushions that bus small businesses have and household um poor households have have already been eroded you know um pandemic savings have gone debt levels are high delinquencies are going up so I worry that if they carry through on what is in the SCP that will be too late now the good news Julie is I strongly believe that had they had the CPI data a couple of days earlier and had they they had today's PPI data we would have gotten a different SCP um and while you're mentioning the SCP as well you say if they carry through well we know that you know the SCP we sort of take it as a very loose guide I think po himself has sort of uh alluded in that direction so I mean how should we as investors read it well we should read it as the markets are reading it today and yesterday ignore it that's exactly what the market did you know if the market had taken it seriously it would have seen first two cuts go to one it would have three Cuts go to one it would have seen four people vote expect no cuts it would have seen a higher inflation um forecast for this year and it would have seen a higher estimate for neutral rate that's a real hawkish tilt but the market for the reasons you've cited are saying well you know what I'm going to ignore that and that's why we've seeing the rally in both income and inequities and I think that's the right thing to do you know there's part of me that thinks that the SCP is excessive transparency excessive communication well they are excessively communicating Muhammad but not always the same message we heard a lot of desent and we saw a lot of descent in that Dot Plot in particular so I'm curious from your perspective if you think the FED has lost the plot a little bit and given the amount of descent amongst the voting members is that potentially more harmful than helpful at this point you know matters lots of people think that and if you look at the questioning yesterday the chair was really pressed on wait a minute this doesn't make sense um I think what you're getting is the consequences of what I call excessive data dependency you know the FED made a very big mistake in 2021 they took a forward-looking view of inflation they said inflation was transitory they held on to that belief for too long and as a result we had a massive hiking cycle including four consecutive hikes of 75 basis points so I think they were so shaken by that mistake that they became just backward looking and this is an excessively data dependent fed when data itself is very noisy which it has been and the market has reacted up and down up and down in terms of yields to that market to that data that volatile data they end up coming across as confused what the FED desperately needs is to have the courage to take a forward-looking view of what the econom is going to do and stick to that view and anchor the markets better I I think Nick timos in the Wall Street Journal called it inflation PTSD uh in his discussion of the FED uh and its mindset right now um Muhammad the last time we talked you said you know when you're looking at all this backward looking data one of the places you go to find sort of more forward looking data is actually company conference calls earnings calls and I'm curious since we last spoke what you are gleaning from those calls what what I'm gleaning is what the forward looking indicators are telling us as opposed to historical data is that demand is weakening you hear it over and over again uh in the different Corporate calls you see it in sentiment and that's why I think that the risks that we started this interview with with the FED share clip is asymmetrical Julie I think there's a much bigger risk that we weaken faster than the FED expects than the other risk that inflation ends up much higher than the FED expects Muhammad are are you concerned about some of the weakness that we are seeing within the labor market and we talk about how maybe much more of a focus the FED should or maybe will be placing on some of the softness that we have been seeing what are your thoughts there and just the risk that this ultimately posed poses here obviously to the broader economy now I worry about it and I worry about it sha because there are no buffers anymore um if you are um a low-income household if you are a small business you're highly reliant on whatever income you're generating you no longer have the buffer or the access to the debt markets that you had before so that if something goes wrong in the case of household it would be if something goes wrong in the labor market then it will not be linear this economy will not weaken in a linear fashion it risks weakening in an accelerated fashion you know I look back at at different hiking Cycles uh and followed by cuts and the one that soft landed in my lifetime and I'm old is 1995 and there the FED cut pretty early um all the others have ended up in bad news because fed the FED tends to be late this data dependent fed because it's so backwardly looking it's so reactive in it fun in its reaction function that it risks being really late Mohammad I want to end by asking you about something we talk about a lot with regards to those company earnings calls that Julie mentioned which is the AI boom and there's this idea that AI is going to drive so much corporate efficiency moving forward how much do you factor that idea into your overall macro Outlook I certainly Factor it when I go beyond on one year to the threee and the fiveyear you know the a what AI can do to productivity is get translated into bigger but not hotter it will allow us to grow more faster but it will not mean that we will be there will be a speed limit in terms of inflation the speed limit will be better than it is now um on there now there are labor consequences there's all sorts of other things we have to pay attention to but it is truly a produ activity enhancing tool that will move the supply side in a favorable way and that will allow us to grow better over the long term all right Muhammad we're gonna have to leave it there thank you so much for joining us that was Muhammad alian Alan's chief economic adviser and thanks to our own Julie Heyman for bringing us this interview as well