Potential for ‘Huge Impact’ as Fed and ECB Diverge
Experts increasingly expect the Fed to raise interest rates more slowly than other central banks, which could lead to parity between the euro and the dollar.
Add Mohamed El-Erian to the growing ranks of those who expect the Federal Reserve to ease monetary policy less quickly than its peers in the coming months.
Slowing growth and sharper disinflation in Europe could prompt the European Central Bank (ECB) to cut interest rates “as often, if not more, than the Fed, which was unimaginable a few months ago,” El-Erian, the president of Queens’ College in Cambridge and a Bloomberg Opinion columnist, said Tuesday on Bloomberg Television.
The potential discrepancy between the pace of Fed and ECB easing “is having a huge impact on relative pricing between Europe and the U.S.,” El-Erian said. “You do see that in the bond market; you see it in the currency market,” he said, adding that parity between the euro and the dollar “is a possibility.”
Traders are awaiting the results of the ECB’s policy meeting on Thursday, when officials led by President Christine Lagarde are widely expected to telegraph a rate cut in June. The ECB is “going to signal quite strongly that June will be when they cut, something the Fed will not do,” El-Erian said.
El-Erian also spoke ahead of new U.S. consumer price index data on Wednesday, a crucial indicator for U.S. policymakers that is expected to show core inflation easing slightly in March. El-Erian has argued that the central bank’s longer-run inflation expectations should be revised higher as macro conditions—like supply chains and productivity—evolve.
“Inflation will be sticky,” he said Tuesday. “But that shouldn’t stop the Fed, because the 2 percent inflation target is too tight for a global economy going through a major rewiring.”
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