Mohamed El-Erian on why the Fed's messaging is 'a mess'

요약 보기

FOMC 25bp 인하는 적절했으나 점도표 분산과 경제전망 불일치로 중앙은행 가이던스 부재가 문제. 물가·성장 상향인데 인하는 모순. 2021년 '일시적 인플레' 오판 후 데이터 의존이 과도해 시장·기업 불확실성 확대. 파월 조기 사임 및 외부위원 도입 등 Fed 구조개혁 필요. 자산 방향에 대한 구체적 예측은 없음.

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01. The latest scatter plot highlights the growing split among FOMC members: one of them sees the Fed raising rates this year. The other, as we can guess, sees a decline of one and a quarter percent over the next two sessions. With us now is Muhammad Erian, President of Queen's College, University of Cambridge.

02. It's great to see you here in our studio. Muhammad, I noticed you retweeted a comment by Jim Bianco, another longtime Fed watcher and investor. He essentially called the last FOMC meeting a mess due to the disagreements not only in Fed rate forecasts but also in economic forecasts. Was it a mess? Others call it confusing and incomprehensible?

03. So, there are two points: at first glance, we got exactly what we expected. We received a 25 basis point reduction. We received a signal of two more declines later this year. But if you look further, everything is very confusing. Economic forecasts suggest otherwise. Higher inflation, higher growth, and that is not consistent with rate cuts.

04. In fact, according to projections, we will have seven consecutive years where the Fed will not meet its inflation target. Now let's move on to what you were just talking about, the interest rate picture. If you look at this over time, the dispersion— that is, the difference between those who favor high rates and those who favor low rates—is so large that there are no predictive benchmarks.

05. So yes, we got a good result where only one person opposed, but if you dig deeper, as Jim aptly pointed out, it's a mess. Ahem. But, given all of this, do you think they reached the right conclusion about their actions, which was a quarter-point reduction? I absolutely think so. In fact, I think a quarter-point cut was warranted back in July.

06. So I'm glad they're starting a down cycle. I am also glad that they are emphasizing employment in their mandate. They are in this difficult situation, as we heard from Gary, where the economy is getting out of their control both in terms of inflation and employment. So they are deep in the world of "lesser evil" and have to decide which risk is greater, and I believe the employment risk is greater.

07. So I like what they did. I just don't like the fact that we are not getting clarity and that the central bank is not giving us any guidance. We need some kind of anchor in this economy, because otherwise everything will become very difficult in the future. What should this anchor look like? When you say " anchor", what do you mean and what should they change?

08. So , in the past, the central bank has always given us a vision of the future, where it thinks we are headed. This central bank, after its big policy mistake in 2021, when it called inflation temporary and, as I said, we will eventually have at least seven years of deviation from the target, has become too dependent on data.

09. So it looks back, and looking back, it doesn't provide guidance to the market and business, and the problem with no guidance from a central regulator is that uncertainty increases, and it deters businesses from investing and can also deter households from spending. In their defense, isn't this an extremely difficult time to be making such predictions?

10. I mean, you're an economist by profession. I've talked to a lot of economists over the last couple of years who have a new source of humility because it's been very, very difficult to predict what the economy is going to do. That said , of course, the Fed has to be the best at this, right? They should know.

11. So, how , how can they even make predictions under such conditions? So we need them and others to have a transparent discussion about two things that really matter to all of us. First—what should we expect from performance? Will we get AI, biosciences, robotics, where we see incredible innovation, a spread through the economy that will allow for significant productivity gains?

12. I believe so. OK. But we need to hear, and secondly, you heard that the first thing wasn't even mentioned. Yes. The second thing, and we heard this at the press conference, is what is actually happening in the labor market. Is this a supply problem or a demand problem? Or both? Or both. And to what extent is it both, and to what extent is it neither?

13. This is really important. Chairman Powell started to say it was like this, and then he said, well no, it's a little bit like this. They need clarity on this, and I think it's possible, but again, they're avoiding the answer. I understand that they are under enormous political pressure. I understand that Chairman Powell's term is coming to an end, but if you don't have a political anchor for this economy, the risk of volatility increases—economic volatility, not market volatility.

14. The market is happy to bet on the corporate sector . The market is a very strange world where he says: "I know that the public sector is a mess, we have tariffs, central bank independence, high fiscal deficits, high bo... I know that it's a mess." but I am ready to bet on the corporate sector . But is the Fed the real source of instability for corporations, or is it perhaps fiscal policy, tariffs— things that are themselves highly volatile—that are the real source of volatility?

15. This is why we need the Fed even more. Because the administration is trying to carry out a large-scale restructuring of both the domestic and global economies. You need some kind of anchor. I'm old enough to remember the early 80s, when President Reagan came in and embarked on a massive restructuring of the domestic economy.

16. The Fed was there, providing a very clear guideline as to where things were headed. You cannot allow a situation where there is great uncertainty about the two most important factors influencing the economy. You caused a stir a few months ago by suggesting on your program that Jay Powell should already be stepping down as chairman of the central bank.

17. That's right. We talked about it. You've faced a lot of skepticism from various quarters, and now you're saying that even if he doesn't resign, he should make some changes now to prepare the Fed for a leadership change. What changes should he implement? So, let's talk about that July discussion. At the time, I worried that because of the tension between the president and the Fed chairman, if Powell didn't go, the attacks on the Fed would only multiply.

18. And that's exactly what happened. And this continues to happen. The reason is very simple. The administration is looking for an excuse, a reason, to fire Chairman Powell. When you examine an institution under a microscope, you are bound to find something. And they find one after another. At the same time, the purpose of the administration changes.

19. Who would have thought in July that they would pay attention to the reappointment of regional Fed bank presidents in February? But suddenly it became relevant. So what I feared is becoming a reality. Another thing is that there is now a mass understanding of what we talked about earlier: the Fed needs fundamental reforms.

20. Greater accountability is needed. More transparency is needed . And less groupthink is needed. We have excellent examples of other central banks that have addressed these issues. The Bank of England, for example, has external members on a committee similar to the FOMC. And these outside members protect against groupthink, because if you're inside the Fed, you have an incentive to be in the crowd and not question it.

21. Well, but at the same time, on the one hand , we have this huge scatter in the dots, what we called a kind of random encounter. On the other hand, you don't want groupthink . I mean, don't these dots indicate that there is no groupthink? And therein lies the problem. People say, “So, let me understand.

22. We have differences, and where are we going? We have rising inflation. Our economic growth is increasing . Our unemployment, according to the Fed, will peak at only 4.5% and then decline again. And yet we are cutting rates. One would expect differences of opinion. This is what you see at the Bank of England.

23. We did n't get that. We only received one dissenting vote. In fact, one of the big surprises was that there was only one dissenting vote. And I think it's important to understand what happens in group dynamics: you tend to repeat and converge, of course, to a certain opinion. And this, unfortunately, undermines the cognitive diversity that is needed at critical moments.

24. There's a reason the Fed keeps falling behind: They lack the cognitive diversity to ask "what if" questions. I found Stephen Moran's statement very interesting: "I'm not the smartest person in the room, but I'm willing to ask the questions that others don't want to ask." " And I think the Fed needs more of that." But is a voice like Myron, or anyone else who becomes Trump's nominee to replace Powell—how do you separate genuine intellectual discussion from someone who is effectively an administration stooge?

25. Look at the Bank of England. All external appointees are people who come from economics or finance, from outside the government, from outside the central bank. It is clear that they will serve one or two terms and return. So they're technocrats , and they're joining other people with different backgrounds, and that's what cognitive diversity is all about—you bring different perspectives, and that's really important.

26. My career has shown that when there are different perspectives in the room and you can discuss it in a safe environment , you get better results. Good. Well, we'll see if that happens. Is there any chance of this, especially before the change of the Fed chairman? Muhammad, thank you very much for coming. Thank you for inviting me.