The latest dot plot highlighting the growing division among FOMC members, with one member seeing the Fed hiking rates this year, another seeing cuts of one and a quarter percent over the next two meetings. Joining me now, Mohamed El-Erian, Queens College Cambridge president. It's so good to have you here with us in the studio, Mohamed. I noticed you retweeted a comment from Jim Bianco, another longtime Fed watcher and investor, who basically said this latest FOMC meeting was a mess in terms of the dispersion not just of Fed rate cut forecasts but of the economic forecasts as well. Was it a mess, and others have called it confused or confusing?
So there are two things. On the surface, we got exactly what we expected: a 25 basis points cut and a signal of two more cuts later this year. But once you go beyond that, it's really confused. The economic projections suggest something else: higher inflation, higher growth, and that is not consistent with cuts. In fact, according to the projections, we're going to have seven straight years where the Fed has missed its inflation target. Then go to what you just talked about, the interest rate picture. If you look over time, the dispersion, meaning the difference between the people up here and the people down here, is so large that there's no forward guidance. So yes, we got a nice outcome with only one person dissenting, but if you go beyond that, as Jim rightly said, it's a mess.
But all of that said, do you think they arrived at the right conclusion for the action that they did, which was the quarter point cut?
I absolutely do. In fact, I think a quarter point cut was warranted in July. So I'm glad that they're starting the cutting cycle. I'm also glad that they are putting the emphasis on the employment side of the mandate. They are facing this very difficult situation, as we heard Gary say, where the economy is going away from them both on the inflation side and the employment side. So they are deep in the world of second best and they have to decide which of the risks is larger. And I think the employment risk is larger. So I like what they've produced. I just hate the fact that we don't get clarity and we don't get an anchor from the central bank. We need some anchor in this economy because otherwise it's going to get really complicated going forward.
What does that anchor need to look like? When you say anchor, what do you mean exactly and what should they be changing?
So in the past, the central bank has always given us a vision of the future where it thinks we're going. This central bank, after its big policy mistake in 2021 where it called inflation transitory and as I said we're going to end up at a minimum of seven years above target, has become highly data dependent. So it's looking backwards, and as it looks backward, it doesn't give guidance to the marketplace, to businesses. And the problem with not having guidance from a central policymaker is that uncertainty goes up, and uncertainty discourages business from investing and could also discourage households from spending.
In their defense, isn't it a really difficult time to give that guidance? I mean, you're in the economics profession. I've talked to so many economists over the past couple of years who have a new sort of source of humility because it's been very, very challenging to forecast what the economy is going to do. That said, of course, the Fed's supposed to be the best at this, right? They're supposed to know. So how can they possibly be forecasting in this kind of environment?
So we need them and others to have a transparent discussion on two things that really matter to all of us. One is what should we expect for productivity? Will AI, life sciences, robotics, where we're seeing incredible innovation, will we get the diffusion through the economy that allows a significant increase in productivity? I believe so, but we need to hear it. And the second thing, you heard that the first thing wasn't even mentioned. The second thing, and we heard that in the press conference, is what's really happening in the labor market? Is it a supply issue or is it a demand issue, or both? And how much of it is both and how much is it one? That's really important. Chair Powell started saying it's this and then said, well, no, it's a bit of this. They need clarity on this, and I think that clarity is possible on this, but again, they're shying away. Now, I understand that under enormous political attack, I understand that Chair Powell is coming to the end of his term, but if you don't have a policy anchor to this economy, the risk of volatility goes up. Economic volatility, not market volatility. The market is happy to bet on the corporate side. The market is in this very strange world where it says, I know the sovereign is messy, we have tariffs, we have central bank independence, we have high fiscal deficits, I know that's messy, but I'm happy to bet on the corporate side.
But is the Fed the real source of volatility on the corporate side, or is fiscal, you know, are tariffs, are policies that are very volatile themselves, is that the real source of volatility for corporations?
So that's why we need the Fed even more, because on the administration side, they are attempting a major rewiring of the domestic economy and a major rewiring of the global economy. You need some anchor. I remember, I'm old enough to remember the early 80s when President Reagan came in and he undertook a major rewiring of the domestic economy. The Fed was there providing a very clear anchor as to where it was going. And you cannot have a situation where you have major uncertainty on the two greatest influences on the economy.
Now, you a couple of months ago made some waves by suggesting that Jay Powell should step down already on your show as head of the central bank. We talked about it. You faced a lot of skepticism on that from various quarters. And now you're saying even if he doesn't step down, there are certain changes he should be making now to put the Fed on better footing going into the leadership change. What changes should he be making?
So let's talk about that discussion of July. At the time, I was worried that because of the tensions between the president and the chair, if Chair Powell didn't step down, the attacks on the Fed would multiply. And that is exactly what happened, and it is continuing to happen. And the reason why is very simple: the administration is looking for cause, a reason to fire Chair Powell. When you look at an institution, take a microscope to it, you will find something. And they are finding one thing after the other. And in the process, the objective of the administration is changing. Who would have thought in July that they would have their eye on the reappointment of the regional Fed presidents in February? But suddenly that's there. So what I was afraid of is happening. The other thing that's happening is now there's a massive understanding about something you and I have talked about before: you need fundamental reforms to the Fed. You need greater accountability, you need greater transparency, and you need less groupthink. And we have really good examples of other central banks that have addressed these issues. The Bank of England, for example, has external members on the equivalent of the FOMC. And those external members guard against groupthink, because if you're within the Fed, the incentive is to be in the herd and not question it.
Well, but at the same time, on the one hand, you have this huge dispersion in the dots, which we called sort of a messy meeting. On the other hand, you don't want groupthink. I mean, don't the dots illustrate that there isn't groupthink?
And that's the problem. People are saying, 'So let me get this right. We have dispersions in where we're going. We have inflation going up. We have growth going up. We have employment, according to the Fed, only peaking at 4.5% and coming back down. And yet we're cutting.' You would have expected two-sided dissents. That's what you get at the Bank of England. We didn't. We got one dissent. In fact, one of the big surprises is we only got one dissent. And I think it's important to understand what happens in a group dynamic: you tend to iterate and converge towards a view. And that unfortunately undermines the sort of cognitive diversity you need at turning points. There is a reason why the Fed has been consistently late, because they don't have the amount of cognitive diversity that they need to say 'what if.' I thought Stephen Miran was really interesting when he said, 'I'm not the smartest in the room, but I'm willing to ask the questions that other people aren't willing to ask.' And I think that the Fed needs more of that.
But a voice like Miran, or whoever ends up being the Trump-appointed nominee to replace Powell, how do you separate an earnest intellectual discussion from someone who is effectively a plant of the administration?
So look at the Bank of England. All the external appointees are people that have come either from economics or finance. They've come from outside the government, outside the central bank. It's understood they're going to serve one or two terms and go back to the outside. So they are technocrats, and then they join other people that have different backgrounds. And that's the whole point of cognitive diversity: you bring different viewpoints, and it's really important. My career has shown that when you have different viewpoints in the room and you can talk about it in a safe area, you get better outcomes.
All right. Well, we'll see if that happens, if there's any chance of that happening, especially before the turnover in the Fed chair. Mohamed, thanks so much for coming in.
Really appreciate it. Your sense of what Jerome Powell said yesterday on the economy?
Yeah, look, I think yesterday was a very interesting day. The chair admitted he's got a problem. He's in a conundrum. He's got a two-factor model. Factor number one is stable prices, which is basically a goal of 2% inflation. He's not achieving that. He's higher than 2% inflation. On the other hand, he's got factor two, which is full employment. He sees very clearly that the employment market is softening. The data has come in very soft. You know, we're seeing 50,000, 25,000 new jobs created each month. So the chairman's sitting there going, look, I'm trying to balance these two parts of the equation. Which one matters to me more today, knowing that if I fix one, I may affect the other? And he sort of admitted that yesterday. So he pivoted yesterday and said, 'I'm going to deal with the employment problem in the United States. We're going to cut interest rates by 25 basis points. We're going to sort of dip our toe in the water.' He actually called it a risk management exercise. Clever. He stuck that in there. Risk management exercise. We're going to cut 25 basis points and we're going to see if we can help job growth in this country, knowing that cutting interest rates is stimulative to the inflationary side of the economy. So he's in there admitting he's got this problem. He's got this conundrum. You know, his committee as a whole, he's got a committee that votes as a whole, really had a pretty interesting divergence of where they think interest rates are going and where they are. You know, you literally had one person on the committee that, even though it seems like they voted for this cut, in their projection of where they think interest rates would be, they did not have this cut in their projection. Then you had six more that said, 'We don't need any more cuts for the rest of the year.' Then you had nine that said, 'We need two cuts for the rest of the year.' So even just looking out between now and year-end, the chair's got to balance a committee that understands they're trying to deal with this two-factor model. You know, it does look like we have started a rate-cutting path, but it seems like it's going to be a slow, methodical path, and it's not a guaranteed path. So you know, if you look at where the dots plot out to the year-end, it's about 3.6%, which is about two and two-thirds of a cut. So it looks like one more is baked in for sure, and maybe two.
Every time the Fed chair mentioned the labor market, I'm like, 'Wow.' I mean, the jobs market's going to stink. It's going to get worse. But does that reinforce the point we've heard from President Trump that this is too late, Jay?
You know, I don't know if it's too late, Jay. The job market has clearly been softening over the last few months. On the other hand, the inflation numbers have not come down as fast as the chair would want. Now they've come down, but they're still stuck, you know, core is still stuck around 3%, 2.9%. And his target is to get it to 2%. So look, you can criticize any part of this whole equation you want. You can criticize that the chair is late because the job market has gotten soft. You could criticize because he's being too aggressive because inflation's too high. Like I said, it's a two-factor model he's trying to balance out. What do you... I mean, you will not hear Powell say this, but did he bend to pressure from the administration? You know, I don't think so. At the end of the day, I don't think he bent. In fact, if you look at the committee, there was one dissenting vote. The entire committee voted for this cut, and there was one dissenter. It's funny, in the meeting prior to this, there were more dissenters than there were in this meeting. So it actually looks like the chair has brought the committee together, is more cohesive. They've got a methodical plan that they're on right now of this slow but steady potential cutting cycle.
How worried are you that we do see a deeper economic downturn at the same time the Fed is cutting rates?
There's always the potential of a deep economic downturn. You know, that's part of the economy. We have events that we don't see coming, and we always get caught off guard because we don't see them coming. So, you know, we have these quote-unquote black swan events. If they were white swans, we'd know they were coming. So look, we're always worried about events like that, and usually there's some cause that happens, some exogenous event that happens. You know, as I sit here today, I don't see anything. But I would have given that same answer a month before a couple of major financial crises: that the world looks good today, I don't see anything. And after these events happen, they look pretty obvious to me. Right now, you know, we're in an environment where the equity market's at record highs, credit spreads are all-time tights, the dollar's weakening, dollar's weakening pretty considerably, but nothing looks too out of line right now.
Do you... you're a plugged-in guy. Do you think we get a Fed chair announcement before year-end? And who do you think gets his job?
Oh, I have no idea when it gets announced. I really don't.
Is there someone you think that would be best suited to get this job?
No. Look, I think the president has a good list of candidates there. There's some people in there that are very, very qualified, very highly qualified, and I think we'd be lucky to have them.
You know, of course, we were talking a little bit about tech off camera. This is an interesting time for tech. We saw the Nvidia-Intel news. Is this a good thing to see these tie-ups like this?
Well, there's some good in this always. Look, the United States, as we know, has to become a chip manufacturer. We cannot be dependent on the rest of the world for chips. Look, we came out of COVID understanding the supply chain better than we ever did before. We understood that without chips being imported to the United States, our economy, our manufacturing economy shut down. You literally could not buy most of the things that we want in this country. Even simple things as toasters today somehow have to have chips. I guess you have to hit your phone in bed to put the toast down in the morning. So look, we now are in an economy where everything we buy has a chip in it. We can't be beholden to the rest of the world. So to the extent that the federal government is getting involved in encouraging chip manufacturing in the United States, and this started in the last administration with the CHIPS Act, and we continue to press on this independence of vital necessity goods in this country, I do think is a good thing.
Do you view it as the administration picking winners and losers?
I hope the administration's not picking winners and losers. It's not their job to pick winners and losers. What it is, the federal government's job is to protect the citizens, protect our safety, protect our well-being. And we know that chips are a vital part of protecting our country. You know, simple missiles today have 300-plus chips in them. So to be able to defend ourselves, to be able to build military equipment, we need to be in the chip manufacturing business here. So that I do applaud, that we understand the risk of not having chip manufacturing in the United States.
IBM investing just billions of dollars in AI and its own infrastructure. Where do you think we are in the AI capex buildout?
You know, look, the AI capex build is pretty transparent. There's an enormous amount of money being spent in data centers. These data centers will come on sort of over the next three to four to five years. You know, we'll continue to see more and more use of AI. What's going on right now is, you know, people are using AI, but they're using sort of independent software, independent programs to solve a specific AI problem. Like an agent. Yeah. Like an agent. So, do my payroll. Oh, do my payroll, handle my HR, read my documents, help me with my tax returns. Where I believe this is going, where IBM believes this is going, this is going to an enterprise-wide solution where all of these AI programs, these AI facilities, will work together. They'll be more coherently, more cohesively related, and they'll have a big infrastructure behind that. And look, that's going to lead us into a really interesting world as people get their data and databases in a more coherent place. And that's what it takes to make AI work. It's going to lead us into a quantum revolution. We think by the end of this decade we're going to have quantum, you know, be a major part of this equation.
Where can I get one of those toasters? IBM doesn't sell those, right?
No, they don't. But we probably wrote some of the software.
Well, that's true. Gary Cohn, good to see you. I'll see you at Davos, man.
