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Investing.com – The emergence of hotter-than-expected inflation numbers after two consecutive shifts in increases has sparked an interesting debate about what he should do next: return to a larger interest rate hike (50 basis points) or maintain the interest rate, said economist Mohamed El-Erian. Slower pace (25 bps) with higher rates being held for longer.
El-Erian stressed that the Federal Reserve should return to raising interest rates more aggressively to control inflation. Bank of America (NYSE:) also said that the Fed will raise interest rates all the way to a “pain point”. There are no serious signs that the economy is under control.
Meanwhile, traders recently added nearly 3 billion new “sell” futures contracts on the S&P 500 index, and pulled out $5.1 billion worth of exchange-traded funds. In addition, the bets tripled on the decline of the Euro Stoxx 50. These signs indicate an upcoming decline in the American and European stock exchanges in the coming period, which reinforces the trends that the Federal Reserve and the European Central Bank will be strict in raising interest rates in the coming period.
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An increase of 50 points or 25?
“The argument for the Fed returning to a 50 basis point increase later this month is predicated on the recent slew of macroeconomic numbers that indicate that inflation is becoming more steady, and not just in the services sector,” El-Erian said.
He emphasized: “From last week’s reversal in downward movement in the core PCE price index, the Fed’s preferred measure of inflation, to the marked uptick on Tuesday, there is now widespread recognition that the Fed was very optimistic at its latest policy meeting as it indicated it was achieving progress in controlling inflation.
At least three Fed officials have already publicly indicated their openness to a 50bp increase after they all opted for a dip to 25bp on Feb 1. Others haven’t thought about it yet and may be on the fence because of the counterargument that it’s too early to assess the full impact of what was.
The proponents argue that a 25-point hike would be enough to give the Fed more time to assess the impact of its policy actions, and may also reduce the risk of destabilizing financial markets in a way that could negatively affect the economy. But it risks giving inflation more time to be embedded more deeply into the economic system; This means that the Fed may have to continue raising interest rates to a weak and weak economy, according to El-Erian.
Interestingly, the final peak rate rises under both policy alternatives. But the time at this peak rate should be longer for the slower flight.
blow to the prestige of the union
El-Erian said, “Going into the last FOMC policy meeting, I felt very strongly that the Fed should not go down from 50 to 25 basis points. Now that that has happened, it is very difficult to come up with a good policy option for the meeting that concludes on the 22nd of March.” “.
He continued: Resuming increases by 50 basis points and canceling many of the previous future policy directives would be another major blow to the damaged standing of the union. But not responding to a set of unfavorable inflation data surprises is also bad for its credibility.
These multiple dilemmas illustrate a much larger, long-term and pursued policy challenge. It is the result of the multistage policy error that the Fed first made when it described inflation as temporary.
Bank of America warning
Bank of America said the Fed will raise interest rates to a “pain point”. There are no serious signs that the economy is under control.
And he stressed: to raise at least 25 basis points for the next three meetings (March, May, June). The markets are pricing themselves at 5.4% by September, but the reality will outpace that.
And the bank continued: “Raising interest rates will continue until the Fed finds a pain point that will hurt consumers. The Fed may have to reach nearly 6% to return inflation to the desired target path of 2%.”