Tags: Mohamed El-Erian | central bank | financial markets | easing

El-Erian: Danger, Danger — 'Market Is in Love With Central Bank Trade'

By    |   Wednesday, 08 April 2015 08:31 AM


Financial markets have grown addicted to central bank easing, and that addiction could cause a heap of trouble when central banks tighten the credit spigot, says Mohamed El-Erian, chief economic adviser at Allianz.

"The market is in love with the central bank trade because it has paid off," he told CNBC.

The Federal Reserve has kept its federal funds rate target at a record low of zero to 0.25 percent since 2008. And experts agree that has played a major role in the six-year bull market that has seen the S&P 500 index triple.

But now the Fed has begun to reduce its stimulus. Many economists expect it will begin raising interest rates in September.

"It reminds me a little bit of 2007 and 2008," when investors tried to discern when the turn would come away from easy credit conditions, El-Erian said. "I'm not so confident that I will see the turn coming, and turns tend to happen quite quickly."

In 2008, of course, the global financial system suffered its worst crisis since the 1930s.

El-Erian criticized the Fed for its cautious approach on raising rates. "They should be a little bit less timid and realize the main risk to the economy comes from mounting financial imbalances that could threaten instability down the road."

MarketWatch columnist Howard Gold also warns about the impact of rising rates in his list of "headwinds" confronting the stock market.
  • "Headwind No. 1: Federal Reserve policy. Top Fed officials have made it very clear that the central bank is gradually moving to more 'normal' interest rates from the near-zero federal funds rate that has prevailed for six years," Gold writes
  • "Headwind No. 2: The U.S. dollar." The dollar index, which measures the greenback against six major currencies, rose to a 12-year high last month. That hurts U.S. companies by making their exports more expensive in foreign currency terms and lowering the value of their foreign revenue when it's converted into dollars. The strong dollar already has taken a big bite out of earnings for many corporations, including IBM and Johnson & Johnson.
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Financial markets have grown addicted to central bank easing, and that addiction could cause a heap of trouble when central banks tighten the credit spigot, says Mohamed El-Erian, chief economic adviser at Allianz.
Mohamed El-Erian, central bank, financial markets, easing
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2015-31-08
Wednesday, 08 April 2015 08:31 AM
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