According to Mohamed El-Erian, there is a key piece of evidence in the surge in the bond market after the latest Fed meeting: the Fed has communication problems.
Nearly a week after policymakers left interest rates unchanged and announced a larger-than-expected rate cut in 2024, traders and the Fed remain at odds on the policy path, said Erian, dean of Queens College at Cambridge University and columnist for Bloomberg review.
The whole point of Fed communication is to do two things: to be transparent, and to strengthen forward policy guidance. He said on Bloomberg TV on Tuesday, "On the contrary, the Fed's communication has confused people." I think we really have a problem. ”
On Wednesday, U.S. Treasury yields began their near-term decline, as investors saw the clearest evidence yet that monetary policy was about to pivot.
This trend has since continued, with swaps markets now expecting the Fed to cut rates nearly six times next year, each by nearly 25 basis points – despite a series of Fed pushbacks against what they believe is too much.
In Yerian's view, this back-and-forth suggests that the Fed has made a mistake, and in this case, it is the market, not the central bank, that is calling the shots.
The market is absolutely right to try to do two things. The first is trying to bully the Fed, because this Fed seems willing to be bullied. Second, don't get carried away by the idea that the Fed will start raising interest rates again. ”
After the Federal Reserve's December meeting, traders are betting heavily that the impact of boosting government debt will be far-reaching and will hinder the fight against inflation, Erian said"The last mile"efforts.
"The fact that you started talking about last Wednesday's meeting on Tuesday's show shows how ridiculous the whole thing is," he said. ”