Chief Economic Advisor, Allianz
Mohamed El-Erian on the Fed's July FOMC meeting, inflation, Robinhood IPO, the economy, and crypto
#MohamedELErian #FederalReserve #Inflation #crypto #GlobalEconomicRecovery
Mohamed El-Erian, President, Queens' College, Cambridge University, Allianz Chief Economic Adviser, joined Yahoo Finance's Myles Udland and Julie Hyman to discuss the Fed, inflation, crypto, and global economic recovery.
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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.
Transcript (21 segments)
✨ AI-enhanced transcript with speaker attribution
M
Miles0:04
We begin this morning talking about the state of the economy, the Fed, and where markets are headed from here after a very busy week for corporate data, but also a busy week in the world of central banking and economic data. Joining us now to discuss is Mohammed El-Erian, President of Queens' College, Cambridge University, and Chief Economic Advisor at Allianz. Mohammed, great to talk with you once again. Let's begin with the Federal Reserve and what we heard from Fed Chair Jay Powell earlier this week. I think sounding a little bit more dovish after some fairly hawkish economic projections perhaps back in June. How did you read his comments and the market's muted reaction to what we heard, if anything? Maybe more of a risk-on type environment in the wake of that.
M
Mohammed El-Erian0:47
Good morning, Miles. Thanks for having me. Yes, he was more dovish than the statement, and that was a boost to markets, and rightly so. Because what he basically told us is that we don't have to worry about growth; it's going to be solid. We don't have to worry about inflation; it will be transitory. We don't have to worry about elevated asset prices, and that he will maintain the $120 billion of monthly asset purchases for longer than the markets expected. The markets have now pushed back the expectations of taper until the end of the year.
J
Julie1:22
Mohammed, it's Julie. Good morning. It's good to see you. We got inflation numbers this morning, of course we got the PCE deflator month over month in June. PCE deflator up a half of one percent, a little bit lighter, a little bit better than had been estimated. But I know you have been consistently on record saying you don't think inflation is transitory. What would you have to see that would sway you from that view?
M
Mohammed El-Erian1:48
So I think we need to keep an open mind, and that's particularly true for the Fed. In the old days, the Fed used to talk about the two tails of the distribution; it used to talk about insurance against both of them. Now we have become a one-sided Fed, this conviction that inflation will be transitory. It's a conviction. What we're hearing from companies suggests that we should have a more open mind. They're telling us about input costs going up, labor costs going up, transportation costs going up. They tell us they don't see the light at the end of the tunnel for these three things. They tell us they have more pricing power. So the only thing I'm saying is keep an open mind. And what I will look at is what companies are telling us. I would like companies to tell us that there's less cost pressure and that they don't feel inclined to increase prices. That's what would make me feel comfortable that inflation is transitory.
M
Miles2:41
And so, Mohammed, how do you think about the bond market then and Jay Powell himself? I wrote about this a few days ago. He said he's not so sure what to make of the decline we've seen in the 10-year. How have you thought about that rally on the long end of the curve?
M
Mohammed El-Erian2:55
So if the Fed is going to be more dovish than people expected, if it will continue buying emergency level bonds at $120 billion, if it's going to continue buying mortgages even though the housing market is red hot, then the bond market will respect that. You want to respect the buyer, especially when the buyer happens to be the Fed printing press in the basement pursuing non-commercial objectives, meaning it is not price sensitive. And what you get are people buying ahead of that. Who's buying? Foreigners are buying, people with asset liability matching needs are buying. So what you really get is a compounding of the fact that the Fed is continuing to buy for longer than what most people thought was going to happen, and indeed quite a few people think they should be starting to taper now.
M
Miles3:50
Mohammed, I want to switch gears because I want to get your thoughts on the retail trading revolution, for lack of a better term. And of course it's fresh in our minds because of the Robinhood IPO, which did not have a huge positive reception. How are you thinking about that trend, where we are in that cycle, and whether or not this represents an inflection point?
M
Mohammed El-Erian4:14
So I think it's wonderful that more people are getting involved in the stock market, especially the younger people. I think for the future of a market-based system, it is good that the younger people have a stake, that they are looking to understand how capital is raised, how capital is allocated. So I am actually very encouraged by this. I'm also encouraged by the fact that Robinhood has shown us that through smart interfaces, you can communicate with the new generation. What I do worry about is how people are investing. I worry a little bit that there's too much of a fad going on, that people tend to buy things because other people are buying things. Hopefully there'll be a learning process, but I think, Julie, if we step back, we want broader participation in the stock market.
J
Julie5:04
And so, Mohammed, thinking about the stock market then and really valuations has been the conversation all year, particularly with most of the FANGs having reported their results, such a large percent of the market cap. Does the US stock market feel healthy to you at this moment in time?
M
Mohammed El-Erian5:20
Look, if liquidity continues to be so incredibly supportive, then yes, it is healthy. I am among the many people who are riding this wonderful liquidity wave, and it's been great. But we think tactically, and this is really important to understand, we recognize that at some point the wave may break. It was summed up best by Leon Cooperman when asked, 'How do you feel about this market? What are you doing?' He said, 'I'm a fully invested bear.' So he's bearish about the outlook but he's fully invested for now. And that's the concern: if we don't start tapering early, you may end up having a massive shock and unnecessary disorderly shock to both the markets and to the economy.
M
Miles6:16
And Mohammed, speaking of shocks, the last couple of weeks we have seen a number of headlines related to Chinese regulatory actions that I think have taken a lot of US investors by surprise. Does this concern you, just in terms of having visibility on this pocket of the market and whether we can trust so many of these businesses that have come to the US markets?
M
Mohammed El-Erian6:39
So there's two elements of contagion we should look at, and they are indirect. So I don't worry that there will be a cascading effect through the markets and the economy, but I keep an eye on two indirect effects. One is what I call the index effect. China has grown to be quite a big portion of the emerging market indices, and to the extent that China becomes less investable, which is what's going on right now, people may start selling the index as a whole. And then the second issue is we were all hoping for a rotation: the US leads, then Europe follows, and then emerging markets. What's happening in China is going to hold back the emerging market trade even more. So we're going to continue to rely on the US as a driver of global markets when a lot of people were hoping for some sort of rotation to keep it more balanced.
B
Brian7:39
Mohamed, Brian here. I really enjoyed your latest FT op-ed, and you're talking at great length about crypto and how Western governments need to stop dismissing the crypto revolution. What should Western governments be doing then?
M
Mohammed El-Erian7:54
So I think both the crypto world and governments need to come together and talk a common language. We have in the crypto revolution really important innovations that have to do with the payment system, and we have to take that seriously. Why do we have to take it seriously? For two reasons. One, it can make financial intermediation more efficient. And second, if we're not careful, China, which is taking a very top-down approach, may start defining the agenda. Why do I say the crypto world as well? Because the crypto world has to take seriously concerns about illicit payments, concerns about money laundering, and concerns about energy use. So it's time for them to speak a common language and try to channel what I think is a really important disruptive innovation in a way that actually helps finance and society.
B
Brian8:49
And what's the biggest risk of not doing that, of US authorities continuing in this line of being skeptical of the crypto world?
M
Mohammed El-Erian8:57
So two ways. The internal risk is that the government will see adoption by the private sector, and we're seeing greater adoption by the private sector every single day. So it's not something that's going to disappear. You'll end up with this very tense tug of war, which is unnecessary in my opinion. But the second, more important issue is that China is not waiting. China has an image about what digital money looks like. It has decided it should have a top-down approach, and it has decided that it wants to export its approach. Why? Because it gives it access to payments platform regionally, it gives it access to data. So we have to take this seriously, otherwise we are going to lose the narrative completely.
M
Miles9:48
And Mohammed, before we let you go, July is wrapping up. You know what that means: right around the corner, Zach Wilson. How are we feeling?
M
Mohammed El-Erian9:55
So I should ask you. I'm actually closing my eyes. The Mets are still in first place, the Jets look somewhat better. I don't want to jinx all this. I'll leave that to you. I'm not talking about it because I still can't believe the Mets are in first place at the end of July.
M
Miles10:11
That's right. Mets and Jets fans know it's better to not talk about it and then just in November you can go see how the Mets did, and it'll end up being better than if you watch.
M
Mohammed El-Erian10:20
And I have my handkerchief ready.
M
Miles10:23
There you go. All right, I always appreciate the time, Mohammed El-Erian, President of Queens' College, Cambridge University, and Chief Economic Advisor to Allianz. Mohammed, appreciate it. I know we'll talk soon.