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Bold Call: Mohamed El-Erian Predicts Federal Reserve Will Reverse Course, Cut Interest Rates in 2020

Last Updated March 4, 2021 2:53 PM
Samantha Chang
Last Updated March 4, 2021 2:53 PM

The Federal Reserve won’t raise interest rates in 2019 and will probably cut them in 2020 ― after raising them a stunning four times in 2018. That what Mohamed El-Erian, the chief economic adviser at German mega-bank Allianz, predicts.

“I suspect they will do nothing this year, and next year will likely loosen,” El-Erian told CNBC  on February 5.

Jerome Powell Projected Two Rate Hikes In 2019

This contradicts the projection of Federal Reserve chairman Jerome Powell, who indicated in December 2018 that the US central bank would increase interest rates twice this year.

However, Powell vowed to be careful about making sure he’s “sensitive” to how repeated rate hikes could crash the US stock market, bringing global indices down with it.

El-Erian, the former CEO of investment management firm Pimco, believes there’s a 50 to 55 percent chance that the Fed will cut rates in 2020.

Fed Hiked Rates 7 Times Under Trump

El-Erian dismissed the media hype over Powell’s dinner with President Donald Trump on Monday (Feb. 4). He says it was important that the two speak in light of Trump’s criticisms of the Fed’s repeated rate hikes during his tenure.

“It’s important for the two sides to hear each other, and it reduces — but it doesn’t eliminate — misunderstandings in the future,” El-Erian said. “I think net-net this is neutral to slightly favorable to the market. But it’s not a big deal.”

El-Erian pointed out that former president Barack Obama met with his Fed chair, Janet Yellen, in 2014 and 2016.

The Fed raised interest rates seven times during Trump’s two-year presidency; it boosted them four times in 2018 alone. In contrast, the Federal Reserve increased rates just once during Barack Obama’s eight-year presidency.

The latest rate hike in December caused the stock market to tank amid press-hyped fears of an imminent recession. Meanwhile, some economists say these fears are overblown.

El-Erian called Jerome Powell’s overly aggressive rate hikes in 2018 a “mistake.” Other economists agree.

When asked about online rumors that he’s interested in becoming a Fed governor himself, El-Erian quipped: “No.”

As it is, El-Erian was the chair of Obama’s Global Development Council from 2012 to 2017 and is not a Trump fan.

Former Congressman Ron Paul: End the Fed

The Fed’s move to raise rates in December 2018 after increasing them just three months earlier prompted retired US Congressman Ron Paul to reiterate his calls to abolish the Fed.

Ron Paul — the father of incumbent US Senator Rand Paul — said the Fed should not artificially dictate rates, but instead should let the free market decide what they should be.

“The Fed has no idea what rates should be,” Paul tweeted. “The Fed manipulates prices, distorts the economy, and makes decisions by looking at the ‘data’ of a distorted economy.”

Paul said the Federal Reserve’s cyclical manipulation of interest rates fuels recessions by creating false economic booms.

“This can create an illusion of prosperity,” Paul said. “Eventually, reality catches up to the Federal Reserve-created fantasies. When that happens, there is a recession or worse, leading the Fed to start the whole boom-and-bust cycle over again.”

El-Erian: Calm Down, No US Recession Ahead

Meanwhile, Mohamed El-Erian reaffirmed that he’s not worried about the US economy. However, he is concerned about economic turmoil in Europe and China.

As CCN.com reported, El-Erian does not believe a US recession is imminent, but he says we can expect erratic fluctuations on the Dow Jones in 2019 because of financial uncertainty in Europe and China.

El-Erian said the US economy will remain strong and will continue to grow at a robust rate of 2.5% to 3%, while wages will continue to rise 3% or more.

“Don’t be surprised if you see these 1,000-point swings in the Dow Jones,” El-Erian said. “That is our new reality for a while.”

“It reflects that we’re coming from a very good 2017. People forget that. Everything went right in 2017: Higher returns, no volatility. So I think of this as a normalization. It doesn’t feel good in the short-term, but it’s OK over the long-term.”

Mohamed El-Erian Image from REUTERS / Shannon Stapleton