Mohamed El-Erian, Allianz chief economic advisor and president of Queens’ College, Cambridge University, said on CNBC’s “Squawk Box” that investors should expect fewer and later rate cuts from the Fed this year.
According to El-Erian, although markets may see some relief in the short term in light of global economic uncertainties and geopolitical developments, the road is not smooth and will be quite bumpy.
El-Erian, who pointed out that economic activity will increase in the next 90 days thanks to the trade truce between the US and China, stated that this situation may be temporary and many uncertainties still continue. Regarding the expectations of the FED to cut interest rates, he made the following assessment: “The possibility of a rate cut has decreased and has been postponed in time.”
El-Erian noted that despite the decline in what economists call “soft data,” “hard data” remains strong, creating mixed signals. He predicted that the U.S. economy will slow down somewhat and inflation will increase, but a sudden jump in unemployment is not expected. He said that companies are avoiding making major decisions, and layoffs may therefore be limited.
The program also discussed the effects of trade wars on reshaped supply chains. El-Erian said that companies are no longer acting with a “China + 1” model, but with a “China + 2 or 3” strategy, which could encourage investment in the U.S. However, he said that for this to happen, the U.S. administration needs to provide clarity on trade policies.
Finally, regarding the global economic outlook, El-Erian said, “We are moving between two possibilities: one is economic fragmentation, the other is a stronger US within a fairer trading system. Right now, the second scenario looks a little more likely, but it’s still a 50/50 situation.
