Submitted by Taps Coogan on the 4th of June 2019 to The Sounding Line.

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Allianz Chief Economic Advisor Mohamed El-Erian recently spoke with CNN Business about the dangerous co-dependence between markets and the Federal Reserve which risks creating a ‘self-fulfilling’ problem.

Some excerpts from Mohamed El-Erian:

“The markets have already priced in three, three, rate cuts this year and they’ve done so on account of three things. One is concern that the trade tensions are becoming even less predictable because of what happened vis-a-vis Mexico last week. Two, the European elections mean a more fragmented regional and national political landscape, harder to implement pro-growth policies. And three, the own dynamics of the bond market, and the concern here is that even if it’s not justified by the US economic conditions, if the markets don’t get a rate cute, they’ll have a huge tantrum that will then contaminate the economy.”

“I think the market has been conditioned through the last ten years to expect the Fed to be their best friend forever… When they don’t see the Fed reacting quickly enough, they force the Fed’s hand and that’s been the story of the last few years. It’s not a good story… Unfortunately, this co-dependence has gone too far and now the markets risk a self-fulfilling problem and that’s one thing that I think the Federal Reserve doesn’t understand well enough…”

“…We need Charmian Powell to indicate (rate cuts) this week. If you look longer term, at some point you’ve got to get out of this unhealthy co-dependence. I think at the end of the day, the Fed will do this short term and will do what previous Feds have done which is simply kick the can down the road.”

“As much as we talk about the Fed, we should be spending a lot more time talking about the European Central Bank. They face an even tougher policy outlook. First, the economy is much weaker… Secondly, let’s not forget that interest rates are already negative in Europe. Third, the ECB is going through a major leadership transition… Remember the ECB. Their complexity is much higher than that of the Fed.”

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

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