Traders are exaggerating the prospects of an aggressive series of interest rate cuts by the Federal Reserve before the end of the year, Mohamed El-Erian said.
“I find it problematic that the market is currently pricing in so many interest rate cuts,” said El-Erian, president of Queens’ College, Cambridge. Bloomberg Thursday television. “The market is exaggerating.”
Treasurys fell on Thursday after Wednesday’s gains following the release of Fed minutes and revisions to US jobs data. A Bloomberg gauge of government bonds is up about 1.8% so far in August.
The past few days. Traders in the swap market have confirmed expectations that Fed policymakers will ease policy by as much as one percentage point by the end of the year, starting in September with the likelihood of a 25 or even 50 basis point cut. Minutes of the July central bank meeting indicated that several officials saw a case for lowering financing costs next month, and latest jobs data – which shows that employment growth was much less robust than previously reported – reinforces that cuts are almost certain.
According to El-Erian, the Fed will more realistically cut borrowing costs by 75 basis points by the end of the year.
“There is this idea of a policy response to a hard landing to achieve a soft landing, which has to be reconciled somehow,” says El-Erian, who is also a Bloomberg Opinion columnist. “The market will have to adapt at some point.”
Traders will be looking for clues about the extent of the Fed’s easing as the central bank’s annual symposium kicks off Thursday in Jackson Hole, Wyoming. Chairman Jerome Powell will discuss the economic outlook on Friday.
