(Aug 23): Traders are overplaying prospects of an aggressive series of US Federal Reserve (Fed) interest-rate cuts before year end, according to Mohamed El-Erian.
“It is problematic in my mind that the market is pricing in so many rate cuts right now,” El-Erian, the president of Queens’ College, Cambridge, told Bloomberg Television on Thursday. “The market is overdoing it.”
Treasuries slipped on Thursday following Wednesday’s gains after the release of the Fed minutes and revisions of US jobs data. A Bloomberg gauge of Treasuries is up some 1.8% so far in August.
In recent days, traders have cemented bets in the swaps market that Fed policymakers will ease policy by as much as one percentage point by year end, starting in September with the likelihood of a 25- or even 50-basis-point cut. Minutes from the central bank’s July meeting signalled that several officials saw a case for lowering borrowing costs next month, and the latest jobs data — revealing employment growth was far less robust than previously reported — reinforces that the cuts are all but assured.
According to El-Erian, the Fed will more realistically ease borrowing costs by 75 basis points by year end.
“There’s this notion of a hard landing policy response to achieve a soft landing; that has got to be reconcilled one way or another,” said El-Erian, who is also a Bloomberg Opinion columnist. “The market’s going to have to adjust at some point.”
Traders will be looking for clues about the scope of Fed easing as the central bank’s annual symposium taking place in Jackson Hole, Wyoming kicks off. Fed chair Jerome Powell will discuss the economic outlook on Friday.
Read also:
Fed officials argue for gradual pace of cuts starting soon
Fed’s Collins says ‘soon’ appropriate to begin easing policy
Fed minutes show several saw case for cutting rates in July
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