Economists Think That The FED Should Go Back To Raising Interest Rates More Aggressively

Mohamed El-Erian, an economist at the Research and Development Research Institute of the University of California at Berkeley, said on Thursday that the Federal Reserve has two policy choices to make when it meets later this month.

‍

When the central bank meets on March 21-22, markets expect another 0.25 percentage point hike. However, they are also allowing for the possibility of a 0.50-point increase, which El-Erian thinks is preferable.

‍

“They should go back to 50 basis points if they are truly data-dependent,” El-Erian told Trade Algo. Nevertheless, if they do so, they undermine their forward policy guidance and undermine the narrative of disinflation.

‍

During the last Fed policy meeting, which concluded on Feb. 1, the Federal Reserve stepped down the level of what had been aggressive rate hikes to a quarter point, or 25 basis points, and indicated that would likely be the path forward for the Fed going forward. The inflation data recently has raised some concerns that the Fed is falling behind with the small increases in interest rates.

‍

There have been several recent suggestions from Fed officials that the possibility of going back to a 50-basis point move could be on the table for the Fed's meeting this month. Basis points are equal to 0.01 percentage points in percentage terms.

‍

In terms of market pricing, according to CME Group data, as of Thursday morning, there was a 69% probability of a quarter-point movement and a 31% chance of a half-point move.

‍

El-Erian believes that both of these moves present problems for the central bank.

‍

`Unintended consequences’

‍

"If you stick to 25 and go higher for longer, which is the alternative, you are risking hiking into a slowing economy, which will undermine your credibility even more," said Theodore. “There is a tragedy when you have to settle for second-best. The farther you are away from the right policy response, which they have fallen behind on, the more likely that whatever you do will have unintended consequences and collateral damage."

‍

There is now a targeted range of 4.5%-4.75% for the Fed's benchmark funds rate, which is currently between 4.5% and 4.7%. Based on the futures trading Thursday morning, it is expected that the rate will rise to 5.59% by autumn of this year and then slowly decline.

‍

Investors are soaring Treasury yields because they're concerned that the Fed could tip us into an unneeded recession, according to El-Erian.

‍

This has been the steepest inversion of the curve between the 10-year and 2-year yields in more than 40 years. It has been the case that every recession has been preceded by an inverted yield curve since at least the early 1980s.

‍