Traders are too bullish on Fed rate cut expectations, says top economist Mohamed El-Erian
Traders are overestimating the prospects of a series of aggressive rate cuts by the Federal Reserve before the end of the year, according to Mohamed El-Erian.
“I think it’s a problem that the market is pricing in so many rate cuts right now,” said El-Erian, principal of Queens’ College, Cambridge. Bloomberg TV on Thursday. “The market is overdone.”
Treasurys fell on Thursday after Wednesday’s gains following the release of the Fed meeting minutes and revised U.S. jobs data. A Bloomberg gauge of Treasuries has gained about 1.8% so far in August.
In recent days, traders have reinforced bets in the swaps market that Fed policymakers will ease policy by up to a percentage point by year-end, starting in September with the possibility of a cut of 25 or even 50 basis points. Minutes of the central bank’s July meeting signaled some officials saw a case for lowering borrowing costs next month and Latest employment data — revealing much less robust job growth than previously reported — further reinforces that cuts are almost certain to come.
The Fed will be more realistic in easing borrowing costs by another 75 basis points by year-end, according to El-Erian.
“There is a concept of a hard landing policy response to achieve a soft landing, which has to be adjusted one way or another,” said El-Erian, who is also an expert. Bloomberg Opinion journalist. “The market will have to correct at some point.”
Traders will look for clues about the scope of the Fed’s easing when the central bank’s annual symposium in Jackson Hole, Wyoming begins on Thursday. Chairman Jerome Powell will discuss the economic outlook on Friday.
