According to Mohamed El-Erian, traders are overestimating the prospects of a series of aggressive rate of interest cuts by the US Federal Reserve before the top of the 12 months.
“In my opinion, it is problematic that the market is currently pricing in so many rate cuts,” said El-Erian, President of Queens’ College in Cambridge, Bloomberg Television on Thursday. “The market is exaggerating.”
Treasuries fell on Thursday after gaining on Wednesday following the discharge of Fed minutes and revisions to U.S. jobs data. A Bloomberg index of Treasuries has risen about 1.8% thus far in August.
In recent days, traders within the swap market have been cementing their bets that Fed policymakers will ease monetary policy by as much as one percentage point by the top of the 12 months, with a cut of 25 and even 50 basis points likely from September onwards. Minutes of the July meeting of the Central Bank signaled that several officials saw a reason to chop borrowing costs next month, and the Current job details — which showed that employment growth was far less robust than previously reported — underscores that cuts are almost certain.
According to El-Erian, the Fed will more realistically cut borrowing costs by 75 basis points by the top of the 12 months.
“There is this notion of a hard landing as a political response to achieve a soft landing that has to be reconciled in one way or another,” said El-Erian, who can also be a Bloomberg Opinion Columnist. “The market will have to adapt at some point.”
Traders will search for clues concerning the extent of the Fed’s easing measures when the central bank’s annual symposium begins on Thursday in Jackson Hole, Wyoming. Chairman Jerome Powell will discuss the economic outlook on Friday.
