The odds of a soft landing are 'meager' and recent rallies in the stock market haven't been supported by fundamentals, Mohamed El-Erian says

© Mohamed El-Erian Mohamed El-Erian Mohamed El-Erian

  • The odds of the Fed sticking a a soft landing of the economy are “meager,” Mohamed El-Erian warned.
  • The economist said that recent rallies in stocks have been unsupported by economic fundamentals.
  • “This is a market that repeatedly falls in love with liquidity and therefore rallies.”

The odds of a soft landing of the economy at this point are “meager,” and recent rallies in the stock market haven’t been supported by fundamentals, according to top economist Mohamed El-Erian.

“Is there some possibility of a soft-landing? Yes, but it is meager,” the chief economic adviser of Allianz said in an interview with CNBC on Monday. “And for a soft-landing to have happened, the Fed should have started moving a year ago.” 

El-Erian has been a loud critic of the Federal Reserve’s delayed response in fighting inflation, warning the central bank’s belated rate hikes have raised the odds of a “damaging recession.” In his view, a downturn is still avoidable–and wouldn’t be as bad as 2008—but the pace of interest rate hikes required to bring down sky-high inflation is making risks “uncomfortably high” that the Fed will bring the economy to a screeching halt, he said. 

Yet, that outlook doesn’t seem to be reflected in the stock market, which rallied last week after Fed officials began to soften their tone on future policy moves. The rally came alongside otherwise dismal news from US companies that reported earnings last week, with large tech companies mostly missing estimates and sparking fears of broad headwinds to future profitability. 

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But El-Erian believes investors are wrong to hope for a pivot at this point, and the recent rallies have only been spurred by prospects of greater liquidity rather than improving economic data, El-Erian said. Prices clocked in well-above the Fed’s 2% inflation target in September, and core inflation still showed signs of accelerating, which means the Fed could risk stagflation if they let up on monetary tightening now, he said. 

“This is a market that repeatedly falls in love with liquidity and therefore rallies. But the sustainability of those rallies is only there if you get fundamentals improving,” El-Erian added. “So far, fundamentals haven’t validated it, and that’s why people are worried we’re going to test the lows yet again.” 

El-Erian urged the central bank to keep up its tightening regime to avoid inflation expectations becoming entrenched. 

“He’s in a bit a bind because on the one hand, I think, he’s inclined to validate the market expectation that we are having a slowdown in the rate hikes,” El-Erian said, “On the other hand, if he does that and financial conditions continue to loosen, then that causes a problem on the inflation front.”

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