Former PIMCO chief Mohamed El-Erian said Monday that the Federal Reserve should raise its benchmark interest rate by 50 basis points at this week’s meeting, citing risk management on the policy side, sticky inflation and the central bank’s credibility.
Speaking to CNBC, the chief economic adviser at Allianz acknowledged that the Fed will likely meet market expectations by downshifting its rate-hiking to 25 bps, as they have signaled. Still, he thinks a heftier increase would be a more prudent move, allowing the Fed to get closer to capping its rate-hiking cycle.
“I’d be shocked if Fed did anything other than 25 bps hike,” the Gramercy advisor and president of Queens’ College said but argued that he “would rather they get the rate hikes out of the way now than wait for later on when the economy could be weaker.”
“Financial conditions have loosened significantly,” the widely followed analyst added. “We are back to the March 2022 levels of financial conditions overall. So they [the Fed] have a window.”
The Fed is scheduled to announce its next interest rate decision on Wednesday, Feb. 1. Investors are almost universally predicting a 25-basis-point increase, with markets pricing in a 98% chance that the hike will be of that amount.
Still, there is still some doubt about what Fed Chair Jerome Powell and his colleagues will say about the future of monetary policy. Most market participants are projecting another 25-basis-point increase at the Fed’s March meeting. However, opinion starts to split for the central bank’s May decision.
Currently, the markets are pricing in a 53% chance that the Fed will stop hiking in May after 25-basis-point increases in both February and March. However, a sizable contingent, representing a 39% chance, think a further hike is likely at the May meeting.
Looking at the current market action, the S&P 500 (NYSEARCA:SPY) (SP500) slumped 1.3% in Monday’s intraday action. Meanwhile, the Nasdaq (COMP.IND) dropped 1.9%, while the Dow (DJI) retreated 0.8%.
The slide came as investors expressed concern about the upcoming Fed meeting, as well as a string of high-profile tech earnings due out this week as well.