(Bloomberg) -- The odds of a September interest-rate cut by the Federal Reserve are tempered by the threat of an inflationary policy shock after the US election, according to Mohamed El-Erian.
“There are two factors that complicate a September cut for this Fed,” El-Erian, the president of Queens’ College, Cambridge, told Bloomberg Television on Friday. “One is they may get one bad data point. The second issue is the politics. How worried are they that there’s going to be an inflationary shock coming after the elections due to policies?”
In the Bloomberg Opinion columnist’s view, the US is not due for a “Liz Truss moment” — when the UK Prime Minister’s budget plans upended markets two years ago, sinking gilts and the pound. But the Fed’s “biggest fear,” he said, is having to reverse course from a coming cycle of interest-rate cuts and hike borrowing costs again as inflation re-accelerates.
In the low-probability scenario that the Fed does raise rates next year, El-Erian added, it will be because of a major external shock or “because the policies elsewhere — fiscal, trade — have fundamentally changed.”
El-Erian spoke after the release of data Friday that showed US producer prices rose more than expected in June, with final demand edging up 0.2% month-over-month. He also spoke a day after a separate, more closely-tracked measure of consumer inflation came in softer than forecast for June. Thursday’s CPI report bolstered bets that the Fed will ease as soon as September while inflation edges toward to the central bank’s 2% target.
“The Fed will keep this wide open,” El-Erian said. “They’ll keep on saying 2% is our target, we get there when we get there. That’s the way of doing slightly higher inflation targeting without them calling it that.”
--With assistance from Jonathan Ferro and Lisa Abramowicz.
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