Fed Policy Error Looms as Economic Slowdown Persists and Inflation Slows

According to Mohamed El-Erian, the slowing economy and softening inflation measured by the Federal Reserve’s preferred index suggest an increasing risk of a policy error by the central bank. As president of Queens’ College, Cambridge and a Bloomberg Opinion columnist, El-Erian noted that the economy is slowing faster than predicted by most economists and the Fed.

The PCE price index, which measures personal consumption expenditures, rose by 2.6% year-on-year in May, marking the slowest rate this year and meeting expectations. Despite updated forecasts indicating a potential rate cut later this year, market interest rates anticipate at least one quarter-point cut, potentially in September. However, El-Erian warned that there is a risk of the Fed keeping rates too high for too long, which could lead to a more severe rate cut down the line.

El-Erian emphasized that the economy is slowing down with limited buffers in place. He suggested that a July rate cut should be considered by a forward-looking Fed. However, he pointed out that the Fed is still heavily reliant on historical data and may not act quickly enough to address current economic conditions. The likelihood of a July rate cut remains low as El-Erian warned that there is a risk of the Fed keeping rates too high for too long.