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Ahead of Federal Reserve Chairman Jerome Powell's testimony to Congress, Allianz chief economic adviser and noted economist Mohamed El-Erian said the central bank chair's message to the market was ‘confused and confusing.'
‘Confused because they said three things that are internally inconsistent. On the one hand, they increased the inflation forecast. They also increased the amount of hikes that they are anticipating. But on the other hand, they did not hike. So, that was an inconsistent set of outcomes,' he told CNBC.
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El-Erian also highlighted the mixed reactions in the marketplace. ‘You have those who believe that this was a committee outcome. So, it is what a committee would come out when the chair is trying to please everybody and you end up in the muddle middle. There are those who think they are signaling a high inflation target and there are those who think they are making a mistake. You saw the divergence in the performance of the equity market and the bond market because of that. So, it is confusing and confused,' he said.
The iShares 1-3 Year Treasury Bond ETF (NASDAQ:SHY) gained 0.037% on Tuesday while the Vanguard Short-Term Treasury Index Fund ETF (NASDAQ:VGSH) rose 0.069%, according to Benzinga Pro.
Last week, the Fed announced a pause in its rate hike campaign but indicated it will hike rates by another 50 basis points this year. According to the economist, the stock market does not believe the central bank is going to deliver two hikes. ‘The equity market has interpreted last week as a pause, not a skip, a pause. Because when push comes to shove, they believe that this Fed will be less hawkish than the bond market believes. That is the big difference right now in the marketplace,' he said.
Fed's Anchoring: El-Erian also stated that data tends to be fluid and never gives a very clear direction on a consistent basis. ‘So, if you are overly data dependent, and you have heard me say over and over again, it is not clear what is the strategic anchoring of this Fed. It is not clear how it sees the economy,' he stated.
El-Erian also asserted the Fed's inflation target is too low and said a new target, if formulated, should be higher. ‘We are now living in a world of supply constraints and if we were to formulate a new inflation target, it will be higher than 2% — it will be more like 3%,' he said.
