Tags: el erian | fed | hikes | market

El-Erian: Trump Is Wrong, Fed Rate Increases Good

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By    |   Wednesday, 10 October 2018 10:52 PM

Investment guru Mohamed El-Erian warns that stock-market plunges such as Wednesday’s 831-point Dow freefall won’t thwart the Federal Reserve’s plans to keep hiking interest rates.

"I don't think this derails the Fed in any way and I think we just have to get used to the fact that we have to stand on the basis of fundamentals and not on the basis of central banks," the chief economic advisor for Allianz told CNBC.

"It's not surprising to me that we're seeing this," he said. "The only question is why it took so long," he said. 

"It's not an easy transition. It's going to be volatile but over the long term it's better for the health and robustness of markets," the Bloomberg Opinion author and Newsmax Finance Insider said.

The Fed has been raising interest rates gradually since December 2015, and last month lifted its target for short-term rates to a range of 2 percent to 2.25 percent, responding to an economy that has been growing at a pace well above what Fed officials believe is sustainable.

However, El-Erian expects the pullback to be temporary because of strong U.S. economic growth.

El-Erian compared the change from a liquidity-driven market to a fundamentally-driven market to an airplane "changing engines” while flying at a high altitude.

However, El-Erian expects the pullback to be temporary because of strong U.S. economic growth. "You've got three domestic engines revving up at the same time," he said, referring to fiscal spending, household income and business investment, CNBC.com explained.

"For the next two years growth prospects are good for the U.S.," he said. "A lot of stress is going on in the context of the U.S. picking up momentum and the rest of the world decelerating."

For his part, Chicago Federal Reserve President Charles Evans suggested on Wednesday. that the central bank can likely stop raising U.S. interest rates once they reach about 3 percent, as long as inflation remains around 2 percent and the economy is doing well.

Inflation, which had been worrisomely low in Evans’ view, is currently at the Fed’s 2-percent target. Unemployment fell last month to a 49-year low of 3.7 percent.

“We could move to a slightly restrictive policy stance and probably pause at that point and see how things are going,” Evans told reporters in Flint, Michigan after a talk at the local chamber of commerce, Reuters reported.

Evans said he estimates neutral to be around 2.75 percent, so “something a little bit above that would be slightly restrictive” and would allow the unemployment rate to rise gradually to a more sustainable level.

Perhaps the biggest critic of the Fed is the commander-in-chief himself.

President Donald Trump again criticized the Fed for raising interest rates following the worst market sell-off since February, Bloomberg reported.

“The Fed has gone crazy,” he told reporters on Wednesday as he arrived in Pennsylvania for a campaign rally. The central bank “is too tight,” he added.

White House Press Secretary Sarah Sanders said in a statement following the close of markets that the U.S. economy is “incredibly strong” despite the selloff, which analysts attributed in part to trade tensions with China.

“It’s a correction we have been waiting for a long time,” Trump said.

The president frequently celebrates publicly when the stock market reaches new highs, pointing to the gains as affirmation for his economic policies.

Trump was briefed on the market turmoil earlier in the day, a White House official said. He has repeatedly criticized the central bank for raising interest rates this year, decisions aimed at preventing the economy from overheating.

“The fundamentals and future of the U.S. economy remain incredibly strong,” Sanders said in a statement. “President Trump’s economic policies are the reasons for these historic successes and they have created a solid base for continued growth.”

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Investment guru Mohamed El-Erian warns that stock-market plunges such as Wednesday’s 831-point Dow freefall won’t thwart the Federal Reserve’s plans to keep hiking interest rates.
el erian, fed, hikes, market
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2018-52-10
Wednesday, 10 October 2018 10:52 PM
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