El-Erian Warns Markets Are Pricing In Too Many Fed Rate Hikes
Allianz chief economic adviser Mohamed El-Erian said investors expect roughly three Fed rate hikes by next September, calling that forecast excessive as inflation runs hot and tech stocks sell off.
Investors are expecting the Federal Reserve to raise interest rates more aggressively than the economy can stand, Allianz chief economic adviser Mohamed El-Erian said in a CNBC interview on Friday.
El-Erian said markets are pricing in roughly two and a half rate increases by the middle of next year and three by September. He disagreed with that outlook, particularly with parts of the economy under strain from borrowing costs and growing questions around the AI investment boom.
“The market is pricing in total two and a half hikes by the middle of next year, three by September. I think that’s too much,” El-Erian said. “I don’t think we’re going to get three hikes. But I understand why the market thinks we are.”
He said markets have correctly read the odds for the next two Fed meetings: a below-20% chance of a hike at the October meeting and a nearly 90% probability of one in December. CME FedWatch data put the October hike odds at 15.5%. “I think that’s right. I think they capture well what is going to happen,” El-Erian said. His dispute is with what investors expect after December.
September’s inflation data showed the consumer price index rising 0.6% on the month and 3.7% from a year earlier, above the 3.6% Dow Jones consensus estimate, according to MarketWatch. El-Erian said the Fed cannot ignore the hot readings even though a near-term hike looks unlikely. The signals from inside the Fed point the same way: Fed officials have said more rate hikes will likely be needed to bring inflation back to 2%.
Tech weakness could spread, he warns
El-Erian also warned that the selloff in technology stocks could drag the wider economy with it. Tech has drawn large domestic and international investment flows, he said, so a sustained decline would have both economic and market effects. He pushed back on the idea that weakness in tech would simply rotate into other stocks, saying the non-tech economy is exposed to tech’s performance.
He said investors are starting to see that the AI trade depends on broad adoption and risk management, not just new inventions. “The AI trade depends not just on invention, which is going really well, but it also depends on broad dissemination, adoption and being able to risk mitigate the unintended consequences,” he said.
Elevated Treasury yields, wider credit spreads and high oil prices could make it harder for the Fed to carry out the aggressive series of hikes markets expect, El-Erian added.
Reporting based on coverage by Stocktwits News and TradingView.
