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
M
Mohammed El-Erian0:00
Reaction this morning please. So now we understand why Chair Powell wanted to separate the SLR decision from the monetary policy decision, because they could have been viewed as contradictory. I don't think they are, but I listen carefully to what Priya said. John, I think the bigger issue here is that the economic paradigm is changing and the Fed doesn't want to change too much the policy paradigm. So while this is a change, it's such a small change. The bigger issues remain, and the reason why is because it doesn't want to disrupt the liquidity paradigm, so.
J
John0:38
Well, when we look forward—whether it's end of quarter or beyond—the question is: how do you reconcile the economic paradigm changes with policy and liquidity? And that's what the market is trying to figure out right now. Mohamed, when you refer to the liquidity paradigm, can you tell us in more detail what you are referring to and the reason you're so concerned about it at the moment?
M
Mohammed El-Erian0:59
It's what you said earlier today when you were on with Tom—which is, have you noticed that good news for the economy has turned out to be bad news for the markets? And it's a complete reverse of last year. And what reconciles all this is that bad news for the economy meant ample and predictable liquidity injections by central banks around the world. Now we're seeing increased dispersion among central banks around the world, and that is undermining what has been a very comforting liquidity paradigm. So that's why you've noticed, and others have noticed, that good economic news has become bad news for markets. And the transmission mechanism is the liquidity paradigm. There's less confidence in the robustness of a liquidity paradigm that has been incredibly helpful for assets.
J
John1:48
Just how cornered are central banks right now, Mohamed? We've seen the moves from Brazil, Turkey this week. Russia may be more to come from the Russian central bank. And the Fed just wanted to stay on hold even with the numbers they're forecasting into 2023. A Fed that is willing just to look through it, sit tight, and not do anything with interest rates.
M
Mohammed El-Erian2:05
Yeah, I mean, it's going to be harder to sustain. They're not going to be able to sustain that position, I think. That even at six and a half percent, they are still not incorporating fully the bounce we're going to get in this economy as long as we don't mess up with the COVID battle. So I'm looking at seven percent plus for growth this year. It is an open question whether inflation will indeed be transitory, but I understand why they are hesitant to change their forward guidance. So I think they're going to at some point find themselves in an even tougher corner. And the hope we all have, John—and it's a really important hope—is that we get a second pro-recovery fiscal package that allows for that handoff that we've been waiting for such a long time from excessive reliance on unconventional monetary policies.
J
John2:57
In the meantime, we've had to deal with a lot of volatility in this bond market, a big drawdown in treasuries, a big surge in treasury yields. Mohamed, you've seen treasury sell-offs a million times over several decades, and we've got the benefit of leaning on your experience right now. How unique is this sell-off been? How unique is this moment for you?
M
Mohammed El-Erian3:16
So John, what's encouraging about this moment is that it hasn't broken anything. If I had told at the beginning of the year that we're going to get a 70 basis points move within the first two-plus months of the year, we would have had a discussion about that catching people offsides. Well, it turned out that very few people got caught offsides, and that, I think, is reassuring in terms of the functioning of the market. Having said that, there were two episodes of illiquidity in the midst of liquidity, and that's one thing that concerns me. But it is unique because of your whole environment, but what's—thank God—it's not unique in terms of creating breakage in markets.
J
John3:57
Well, I know you've been more concerned about financial stability than you have inflation when others have been focused on that. You said nothing's broken. Mohamed, I just wonder whether we're starting to see cracks leading to something breaking in emerging markets. I'll spend a bit more time talking about that through the program. What's your response been to what's been happening developing in EM, and what's the team at Gramercy got to say about it?
M
Mohammed El-Erian4:17
So I can't speak on behalf of the team at Gramercy; Robert would be much better placed. But the message I think that is consistent with what they're thinking is the following: it's very hard to make a case for EM in general, but you can make a case for being long or short different names. EM is very diverse right now, and you can no longer rely on liquidity just going there. It is going to be a very selective year for emerging markets, and it will be for risk assets as well. Look at what's happened so far this year—as of yesterday, banks were outpacing the Nasdaq by 30 percentage points. So the market is starting to figure out that the liquidity paradigm, if it reverses, will hurt certain segments more than others. And I think the market is seeing its way through it, but it's going to be a very differentiated marketplace.
