Submitted by Taps Coogan on the 14th of August 2019 to The Sounding Line.

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Allianz chief economic advisor, Mohamed El-Erian, recently spoke with CNBC to discuss his outlook on interest rates, the Fed, the US economy, and trade negotiations with China. While he doesn’t think the real US economy is likely to slip into a recession on its own, increasing market sensitivity, external slowing, and the likelihood of continued escalations in the trade war with China risk creating a self-fulfilling trend of worsening market conditions.

Some excerpts from Mohamed El-Erian:

“… The CPI number highlights the dilemma facing the Fed, which is neither the real economy nor inflation is calling for what the market has priced in, but the Fed will have no choice but to deliver what the market has priced in. That’s the first set of dilemma and the second one is look at how the narrative has evolved. It used to be that the Fed can help us avoid a slowdown. Then it went to ‘the Fed is pushing on a string, but it’s okay, it helps financial markets.’ This morning on your show, you had guests saying rate cuts would be bad for markets. What we are seeing is the Fed is being viewed increasingly as being less effective and people are starting to worry about the risks and the unintended consequences. ..”

“(Falling interest rates) is not a US story. It’s well beyond a US story. But remember, we relied on central banks to stop the spill back from messy politics into the markets and the economy. Now that (central banks) are becoming less effective, markets are becoming much more sensitive to political dislocations…”

“I think the best you could hope for if you are looking for some resolution of tension (vis-a-vis the US-China trade war) is a temporary ceasefire. But that ceasefire will prove not just temporary but reversible. We are looking at further escalation of trade tensions… I think that the economy is fine and the business confidence numbers today show that. I think you are looking at growth in the range of 2% to 2.5%. The problem is not the economy. The problem is the markets are much more sensitive to what happens outside (the US), because the markets are more open to the global economy and the thing that you’ve got to fear is a self fulfilling concern…”

There is more to the interview, so enjoy it above.

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