The central bank will meet on May 7 to determine its next interest rate. Currently, the market expects interest rates to remain unchanged after the May meeting, but the 60% chance in June is reduced by 25 basis points, according to CME Group's FedWatch. This expectation reflects “When there are any signs of abnormal market volatility, the Fed repeatedly trains them how to expect a looser financial situation.”
El-Erian, former CEO of investment management firm PIMCO, believes the Fed should not lower interest rates too early because “Lessons learned in central bank history show that in the face of two parts of the double mandate against it, the Fed should prioritize putting inflationary Genie back into its bottle.”
El-Erian wrote that it is especially critical to curb inflation, given the Fed’s credibility erosion by “the misguided 2021 transition inflation judgment.” “After the United States' co-lockdown and the emergence of consumer price increases, Powell described inflation as “temporary” expecting it to ease quickly. Instead, the price increase continued even after positive interest rates, and stubbornly exceeded the Fed's 2% target.
El-Erian believes that because of this credibility, it is even more important for the Fed to prove its inflation mandate. To its credit, the central bank has so far avoided knee-jerk reactions to recent stock market volatility, and a growing trend of recession expectations by top Wall Street economists.
