Tags: El-Erian | Fed | patient | statement

El-Erian: Fed Might Remove 'Patient' From Statement, But It Will Remain Patient Anyway

By    |   Monday, 16 March 2015 02:00 PM

Federal Reserve watchers have spent a great deal of time debating whether the Federal Reserve will remove the word "patient" from its next policy statement to describe its approach toward raising interest rates.
 
Mohamed El-Erian, chief economic adviser at Allianz, thinks the Fed will indeed drop the word at the end of its meeting Wednesday. But he expects the central bank to continue its patient stance nonetheless.
 
"We're going to see another round of linguistic gymnastics," he tells CNBC. "So I wouldn't be surprised if this notion of the Fed having to be 'sufficiently confident about inflation' creeps in as a way of keeping markets from rushing" to judgment about when rates will be increased.
 
Economists' consensus is that the Fed will move around mid-year. It has kept its federal funds target rate at a record low of zero to 0.25 percent since December 2008.
 
The Fed has an inflation target of 2 percent. But its favored inflation gauge, the personal consumption expenditures price index, climbed only 0.2 percent in the 12 months through January.
 
However, if the Fed leaves the word "patient" in their statement, "you will see the gap between the 10-year Treasury and the [German] bund collapse. . . . Secondly, equity markets will react positively," El-Erian notes.
 
"I don't think they will" leave patient in the statement. "But that's what would happen if they did."
 
Meanwhile, Fortune Senior Editor Stephen Gandel offers several reasons why the Fed "is not going to raise rates anytime soon (or at least not as soon as June, or even this summer)."
 
  • "The job market is weaker than it looks." he writes. The unemployment rate slipped to an almost-seven-year low of 5.5 percent in February and non-farm payrolls rose 295,000, representing the 12th straight month with a gain of at least 200,000. That's the longest such streak since 1995. But average hourly wages rose only 2 percent in the 12 months through February. And the labor participation rate totaled only 62.8 percent last month, barely above the 37-year low 62.7 percent.
  • "A strong dollar will slow exports." The greenback has risen to multi-year highs against a range of currencies in recent weeks. An ascendant dollar hurts U.S. exports by making them more expensive in foreign currency terms. It also hurts U.S. corporate earnings, both by dampening exports and by lessening the value of companies' foreign revenue when translated into dollars.

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Federal Reserve watchers have spent a great deal of time debating whether the Federal Reserve will remove the word "patient" from its next policy statement to describe its approach toward raising interest rates.
El-Erian, Fed, patient, statement
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Monday, 16 March 2015 02:00 PM
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