Odaily News Mohamed El-Erian, former CEO of Pacific Investment Management Company (Pimco) and president of Queen's College, University of Cambridge, said that under the impact of unexpected inflation data, the Federal Reserve may not cut interest rates for "quite a long time" and may even tolerate higher inflation to protect economic growth.
El-Erian pointed out on Wednesday that if the Fed is truly committed to achieving its 2% inflation target, it should theoretically raise interest rates now. But the reality is that the Fed is more likely to keep interest rates unchanged and preserve economic growth and the United States' "exceptionalism" by tolerating higher inflation.
Bond traders are pushing back bets on the next Federal Reserve rate cut to December as U.S. inflation exceeds expectations.
Swap contracts tied to the Fed's future decisions were repriced after the January CPI beat expectations. Previously, the market expected the Fed to cut interest rates before September. The new interest rate level means the market is betting that the Fed will only cut interest rates by 0.25 percentage points this year.
Regarding the January CPI data, El-Erian said frankly: "On the surface, this is not good news for the Fed. They will continue to reassure the market that everything will be fine, but I think the interest rate pause button will be pressed longer than the market expects."
El-Erian criticized Federal Reserve Chairman Powell and his colleagues for overreacting to economic data and delivering confusing forward guidance to investors, exacerbating market volatility.
He said bluntly, "This Federal Reserve lacks a strategic anchor. They have not provided meaningful forward policy guidance, which is a major mistake."
He added that the hot inflation data was not an "outlier" because it was consistent with other economic data. In addition, the report showed that businesses and consumers are now more sensitive to actual and expected cost increases.
He said: "This is a different economy," implying that the US economic situation is different from before.
Bank of America economist Aditya Bhave and others said the January CPI report strengthened their confidence that the Fed's rate-cutting cycle has ended. "Rate hikes now seem less incredible," they wrote in a report after the data was released. (Jinshi)