Submitted by Taps Coogan on the 8th of October 2019 to The Sounding Line.

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Allianz Chief Economic Advisor, Mohamed El-Erian, recently spoke with Bloomberg and questioned the prudence of yet another Fed interest rate cut at the upcoming meeting in October given that there is no evidence that credit growth is actually constrained and that the economy is performing at trend.

 

Mohamed El-Erian:

“…In pure economic terms it is very hard to justify a rate. However, with my market hat on, I say they have no choice and they are going to cut (again) because if they don’t cut the risk of a market disruption spilling back on the economy is high. So they are going to cut for negative reasons, not positive reasons. Clearly, some people are going to be uncomfortable with that…”

Bob Michele:

“I feel it’s evidence that they’re structurally behind the curve, that they’re looking at data that occurred last month, last year. And we’re saying that the trade (war) has created a manufacturing recession globally, which could spill over into the US consumer…”

Mohamed El-Erian:

“…What will a rate cut do to counter the trade issue? What evidence do we have that anybody is credit constrained?

Bob Michele:

“The other argument is there is no inflationary pressure. What do you have to lose by bringing rates down to zero? Why not?”

Mohamed El-Erian:

“You lose flexibility for the future. You lose the ability to change financial conditions when they are really tight.”

 

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

As we have noted before, by continuing to cut now, in advance of a slowdown to below average growth in the economy let alone an actual recession, the Fed is transforming itself into a pro-cyclical force, the exact opposite of what it was designed to do.

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