Lead Economist Mohamed El-Erian says US ‘not in recession’, expects 2 more rate hikes

However, “the stock market is much more dovish,” he said, referring to the subsequent rally after the widely anticipated 0.25% Fed rate hike on Wednesday.

“Markets are waiting for a maximum of another increase and then expecting a decrease (rate) from the middle of this year. Whereas the Fed has told us they don’t intend to cut,” Mr. El-Erian. added.

What’s interesting, he said, “is that we’re not afraid of the Fed. They gave us very clear signals. The market said, “You’re wrong.” So it’s interesting. I don’t remember such a long disagreement where the markets don’t listen to what was said very clearly.”

The US economy “is not in a recession” and he does not see one in the future, said UK-based Mr El-Erian, president of King’s College Cambridge and chief economic adviser to Pacific’s parent Allianz. Investment Management Co., where he was previously CEO and co-chief investment officer.

The main reason Mr. El-Erian said he does not expect a recession is the counter currents in the US labor market. Jobs now far outnumber the unemployed, he said, adding that “for every unemployed person, there are 1.9 open jobs.”

While he acknowledges that “the chance of a recession exists, some people argue that it is far from 100% or 80%.”

He predicts “anemic” US economic growth and by mid-2023 “we will see inflation stuck at 4%. The reason is that inflation has migrated. This is the price of the Fed being late in raising interest rates.

Inflation is changing as food and energy prices fall, and price increases spread to the services sector.

“This is a very important change. Commodities lowered inflation. But services are less sensitive to monetary policy, especially higher wages, which are more sticky” in the service sector.

“So I suspect we are stuck at 4% inflation,” Mr. El-Erian said. The Fed’s 2% inflation target is “arbitrary.”

What role could China’s economic recovery play in global inflation?

Mr El-Erian said some investors, such as the head of Norway’s sovereign wealth fund, believe that global inflation will pick up again in the second half of this year due to China’s reopening.

“I’m not there,” he said of this scenario.

Another mystery: What tightening financial conditions is Mr. Powell seeing and what is he referring to in his latest testimony?

“It’s a headache. People cannot understand it. One interpretation is that he moved to a very narrow concept of inflation such as basic services excluding housing. It’s a mystery.”

The full transcript of Mr. El-Erian’s interview is available at Twitter Space.

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