- The chances of the US Federal Reserve cutting interest rates in September are diminishing, due to the risk of an inflationary policy shock after the US elections, according to Dr. Mohamed El-Erian, President of Queens' College, Cambridge, and a leading global economist.
- “There are two factors complicating the possibility of the Fed cutting rates in September,” El-Erian told Bloomberg TV on Friday. “One is that they might get one point of bad data, and the other is politics, and how worried they are about an inflationary shock after the election because of policies.”
- In El-Erian’s view, the United States has not yet had its “Liz Truss moment,” when the former British prime minister’s plan turned markets upside down two years ago, sending government bonds and the pound sterling tumbling.
- But El-Erian noted that the Fed’s “biggest fear” is having to reverse course in the next cycle, from rate cuts to raising borrowing costs again as inflation accelerates again.
- He added that in the low-probability scenario that the Fed will raise interest rates next year, it will be because of a large external shock, or “because policies elsewhere, fiscal and trade, have fundamentally changed.”
- El-Erian was speaking after data showed U.S. producer prices rose more than expected in June, with final demand rising 0.2% on a monthly basis, and a day after a separate, closely watched measure of consumer price inflation came in lower than expected for June.
