About Mohammed El-erian
Mohamed El-Erian, chief economic advisor at Allianz and a professor at the Wharton School, has appeared on CNBC multiple times in recent months to discuss the economic impact of geopolitical conflicts, inflation, and Federal Reserve policy. He stated that the U.S. economy has so far avoided "demand destruction" from the Middle East war, but warned that the next phase of the shock would involve affordability issues severe enough to reduce consumer spending. He described the current economic environment as having four phases: higher energy prices, broader inflation, demand destruction, and potential financial instability. El-Erian said he is "really worried" about the UK, noting that the 10-year yield above 5% is "crippling for mortgages and for businesses" and makes government debt more explosive.
Regarding the Federal Reserve, El-Erian said he expects the Fed to "sit on their hands" and not cut rates for most of the year, and that a rate hike is more likely than a cut. He suggested the Fed is tolerating a 3% inflation target rather than 2%, as long as inflation expectations remain stable. On Fed Chair nominee Kevin Warsh, El-Erian said he believes Warsh will "err on the side of lowering rates earlier" than the current Fed would, citing Warsh's belief in the productivity enhancement of AI. El-Erian also expressed concern about the volume of funding needed from capital markets, citing large IPOs, government deficits, and corporate borrowing for AI investment, and said he cannot identify where all the money will come from, predicting it will push borrowing costs higher.
Source: AI-verified profile updated from Mohammed El-erian's recent appearances.
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✨ AI-enhanced transcript with speaker attribution
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Narrator0:00
War, to the economy, we will bring it to you. Now, the story that we are following, of course, is that the European Central Bank announcing its first rate hike in three years. The ECB President, Madame Christine Lagarde, says policymakers have to act fast.
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Christine Lagarde0:23
If you let inflation start running out without control, then it becomes a much more difficult situation to bring it back to the level of price stability that we have defined. So the good decision was actually to raise interest rates, to commit and to deliver on price stability.
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Narrator0:48
Now, what the president is talking about is looking out for so-called second round effects. That's when the initial price shock spills over into the broader economy. For instance, higher oil prices. That is the primary effect. And but it can eventually raise prices across different sectors. Workers may eventually ask for higher wages. Companies raise prices to make that happen. Consumers might reduce their spending, and economies start to slow. The ECB probably won't be the only central bank to raise this year. Inflation in the U.S. hit a three year high in May. Investors believe it's likely the Fed will probably raise rates by the end of the year. Mohamed El-Erian is the Allianz Chief Economic Adviser. Now, Mohammed, the question here. Now I've read your views on this. To the extent that you don't think that, you know, a cut or a hike is likely, but I think I'm going to phrase it is should the Fed be raising rates sooner rather than later, bearing in mind the inflation rate is higher here than in the Eurozone.
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Mohammed El-Erian1:59
So because the Fed has to worry about two things, not one, the so-called dual mandate like the ECB, it has to deliver price stability. But it also has an employment objective. As you know, I suspect the right thing for the Fed to do is to wait. The ECB is different. As you know, Richard. They only have one mandate inflation. And I think they're absolutely right to hike. Had they had two mandates they would have waited as well.
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Richard2:29
So what do you think is the upper level of interest rates? The primary rate in a sense as a result, where do you think we're going on the rate of inflation before the Fed would really have no choice?
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Mohammed El-Erian2:44
So the key issue is what's called core inflation. Core inflation strips out the volatile aspect. So you're absolutely right. The last inflation print, which was yesterday, was 4.2% at the headline. But the core was only 2.8. And in fact the core came in slightly below what's expected. We would need to see the core above 3% for consecutive months. Now, I don't want to say everything is fine because we've got another price data today, and that is PPI. That is the producer prices. What's in the pipeline. And believe it or not, that went up to 6.5%. So so far, the spillover you talked about has been limited. But we need to keep an eye on this.
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Richard3:32
What would be the term? Not so much in numerical terms, but what causes producer prices and CPI to move into core inflation? Because if you've stripped out the volatile bits, when do you what what's the turning point? In a sense.
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Mohammed El-Erian3:53
So the turning point is when companies believe that demand is strong enough in order to pass on the higher cost into higher prices. Right now there's some hesitancy to pass on the higher costs. So what we're seeing is we're seeing them take it on margins. And as you know, profit margins are incredibly healthy. So most companies can afford to sacrifice a bit of margin because they don't want to alienate their customers if they're not sure that this inflation shock is going to be long duration. The last thing they want to do is upset their customers, who already are very upset about affordability and the cost of living.
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Richard4:37
One can't help feeling and listening to what Christine Lagarde said is that, you know, the difficulty of bringing it back. The Fed seems to be content to keep inflation. How you know better than me how many months they've now been out over their own target rate, but they seem to be quite content for to stay over 2%, over 3% for some months to come. On the headline number.
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Mohammed El-Erian5:06
Yes. So they've been over 2% that target for 62 consecutive months, over five years.
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Mohammed El-Erian5:13
So unheard of. And it will continue for at least another year. Deep inside, I think the Fed understands that 2% is too low a target for an economy that's going through so many changes on the supply side. So I suspect that they are tolerating a 3% target, not a 2%, a 3% target. As long as this notion of inflation expectations stays stable. And I think that's what's happening. And that's why despite 62 months of having missed that target, they're not going to hike rates for this year.
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Richard5:48
SpaceX tomorrow. I mean, it's got a sexiness to it. The market's going to go off to the races. Is there any major significance in a macroeconomic sense for these 3 or 4 massive IPOs?
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Mohammed El-Erian6:08
You know, in the old days, we used to do an exercise. We used to look at who needed funds and who would provide funds. We forgot about that exercise. But I think now we are the significance of these massive IPOs is that they come on top of governments having to fund high deficits, on top of companies having to borrow in order to invest in AI. And I scratch my head, Richard, where is all this money going to come from? I really cannot identify where all this money is going to come from. So the macro implications is, I suspect that's going to push borrowing costs higher for the economy as a whole.
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Richard6:47
Back of the sofa, Mohammed, back of the sofa. They'll find some more. They'll find some loose change.
