Mohamed El-Erian said traders are overestimating the chances of the US Federal Reserve making sharp interest rate cuts before the end of the year.
“It’s problematic in my mind that the market is pricing in a lot of price cuts right now,” said El-Erian, president of Queens’ College, Cambridge. Bloomberg TV Thursday. “The market is overdoing it.”
U.S. Treasuries fell on Thursday after gains on Wednesday following the release of Federal Reserve meeting minutes and a review of U.S. jobs data. The Bloomberg Treasury Index is up about 1.8% so far in August.
In recent days, traders have been ramping up bets in the swaps market that Fed policymakers will ease policy by as much as 1 percentage point by the end of the year, starting in September with a possible 25 or even 50 basis point cut. Minutes of the Central Bank Meeting in July Several officials have indicated that borrowing costs need to be lowered next month, Latest job data The revelation that employment growth was much less robust than previously reported confirms that cuts are almost certain.
According to El-Erian, the Federal Reserve will more realistically ease borrowing costs by about 75 basis points by the end of the year.
“There is an idea that there is a policy response to a hard landing to achieve a soft landing, which has to be reconciled with everything else,” said El-Erian, who is also an economist at the World Bank. Bloomberg Opinion “The market will have to adjust at some point.”
Traders will be looking for clues on the extent of the Federal Reserve’s monetary policy easing as the central bank’s annual symposium kicks off in Jackson Hole, Wyoming, on Thursday. Fed Chairman Jerome Powell will discuss the economic outlook on Friday.
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