00:00 Speaker A
The latest dot plot highlighting the growing division among FOMC members with one member seeing the Fed hiking rates this year, another, who we can probably guess, seeing cuts of one and a quarter percent over the next two meetings. Joining me now Mohamed El-Erian, Queen's College, Cambridge President.
00:22 Speaker A
It's so good to have you here with us in the studio, Mohamed. And so, I noticed you retweet a comment from Jim Bianco, another long-time Fed watcher and investor. And he basically said, this meeting was a mess of this latest FOMC meeting in terms of the dispersion, not just of Fed rate cut forecasts, but of the economic forecast as well. Was it a mess?
00:51 Mohamed El-Erian
And others have called it confused, confusing. Um, so there's two things. On the surface, we got exactly what we expected. We got a 25 basis points cut, we got a signal of two more cuts later this year. But once you go beyond that, it's really confused. The economic projections
01:18 Mohamed El-Erian
suggest something else. Higher inflation, higher growth, and that is not consistent with cuts. In fact, according to the projections, we're going to have seven straight years where the Fed has missed its inflation target. Then go to what you just talked about, the interest rate picture. If you look over time, is a dispersion, meaning the difference between the people up here and the people down here is so large that there's no forward guidance.
01:45 Mohamed El-Erian
So, yes, we got a nice outcome with only one person dissenting, but if you go beyond that, as Jim rightly said, it's a mess.
01:58 Speaker A
Hmm. So, but all of that said, do you think they arrived at the right conclusion for the action that they did, which was the quarter point cut?
2:07 Mohamed El-Erian
I absolutely do. In fact, I think a quarter point cut was warranted in July. So I'm glad that they're starting the cutting cycle. I'm also glad that they are putting the emphasis on the employment side of the mandate. They are facing this very difficult situation, as we heard Gary say, where the economy is going away from them both on the inflation side and the employment side. So they are deep in the world of second best, and they have to decide which of the risk is larger, and I think the employment risk is larger. So, I like what they've produced.
2:41 Mohamed El-Erian
I just hate the fact that we don't get clarity and we don't get an anchor from the Central Bank. We need some anchor in this economy because otherwise it's going to get really complicated going forward.
2:54 Speaker A
What what does that anchor need to look like? What does when you say anchor, what do you mean exactly? And what should they be changing?
3:04 Mohamed El-Erian
So in the past, the central bank has always given us a vision of the future. What where it thinks we're going. This central bank, after its big policy mistake in 2021, where it called inflation transitory, and as I said, we're going to end up at a minimum with seven years off of target, has become highly data dependent. So it's looking backwards. And as it look backward, it doesn't give guidance to the marketplace, to businesses. And the problem with not having guidance from a central policymaker is that uncertainty goes up. And uncertainty discourages business from investing and could also discourage households from spending.
3:52 Speaker A
In their defense, isn't it a really difficult time to give that guidance? I mean, you know, you're in the economics profession. I've talked to so many economists over the past couple of years who have a new sort of source of humility because it's been very, very challenging to forecast what the economy's going to do. That's said, of course, the Fed's supposed to be the best at this, right? They're supposed to know. So, but how do you how how can they possibly be forecasting in this kind of kind of environment?
4:26 Mohamed El-Erian
So we need them and others to have a transparent discussion on two things that really matter for all of us. One is, what should we expect for productivity? Will AI, life sciences, robotics, where we're seeing incredible innovation, will we get the diffusion to the economy that allows a significant increase in productivity? I believe so.
4:55 Mohamed El-Erian
Okay, but we need to hear it. And then the second thing you heard that, the first thing wasn't even mentioned. The second thing, and we heard that in the press conference is what's really happening in the labor market? Is it a supply issue? Is it a demand issue?
5:12 Speaker A
Or both.
5:12 Mohamed El-Erian
Or both. And how much of it is both? And how much it would last. That's really important. Um, Chair Powell started saying it's this, and then said, well, no, it's a bit of this. They need clarity on this. And I think that clarity is possible on this. But again, they're shying away. Now, I understand they're on the enormous political attack. I understand the Chair Powell is coming to the end of his term. But if you don't have a policy anchor to this economy,
5:42 Mohamed El-Erian
the risk of volatility goes up, economic volatility, not market volatility. The market is happy to bet on the corporate side. The market is is this very strange world where it says, I know the sovereign is messy. We have tariffs, we have Central Bank independence, we have high fiscal deficits, high debt. I know that's messy, but I'm happy to bet on the corporate side.
5:58 Speaker A
But is the Fed the real source of volatility on the corporate side or is fiscal, really, you know, our tariffs, our policies that, you know, sort of are very volatile themselves. Is that the real source of of volatility for corporations?
6:15 Mohamed El-Erian
So that's why we need the Fed even more because on the administration side, they are attempting a major rewiring of the domestic economy and a major rewiring of the global economy. You need some anchor. I remember, I'm old enough to remember the early 80s when President Reagan came in and he undertook a major rewiring of the domestic economy.
6:40 Mohamed El-Erian
The Fed was there providing a very clear anchor as to where it was going. And you cannot have a situation where you have major uncertainty on the two greatest influences on the economy.
7:02 Speaker A
Now, you a couple months ago made some waves by suggesting that J. Powell should step down already
7:09 Mohamed El-Erian
on your show.
7:10 Speaker A
as head of the central bank. Exactly, we talked about it. Um, you faced a lot of skepticism uh on that um from various quarters. And now you're saying, even if he doesn't step down, there are certain changes he should be making now to put the Fed on better footing going into the leadership change. What what changes should he be making?
7:29 Mohamed El-Erian
So, let's start with our discussion of July. At the time, I was worried that because of the and the tensions between the president and the chair, if Chair Powell didn't step down, the attacks on the Fed would multiply. And that is exactly what happened. And it is continuing to happen. And the reason why is very simple, the administration is looking for cause, a reason to fire Chair Powell. When you look at an institution, take a microscope to it, you will find something. And they are finding one thing after the other. and in the process, the objective of the administration is changing.
8:12 Mohamed El-Erian
Who would have thought in July that they would have their eye on the reappointment of the regional Fed presidents in February. But suddenly that's there. So, what I was afraid of is happening. The other thing that's happening is now there's a massive understanding about something you and I have talked about before is you need fundamental reforms to the Fed. You need greater accountability, you need greater transparency, and you need less group think. And we have really good examples of other central banks
8:44 Mohamed El-Erian
that have addressed these issues. The Bank of England, for example, has external members on the equivalent of the FOMC. And those external members guard against group think because if you're within the Fed, the incentive to be in the herd and not question it.
8:54 Speaker A
Well, but at the same time, on the one hand you have this huge dispersion in the dots, which we called sort of a messy meeting. On the other hand, you don't want group think. I mean, don't the dots illustrate that there isn't group think?
9:08 Mohamed El-Erian
And that's the problem. People are saying, so let me get this right. We have dispersions and where we're going. We have inflation going up. We have growth going up. We have employment according to the Fed only peaking at 4.5% and coming back down. And yet we're cutting? You would have expected two-sided dissent.
9:23 Speaker A
Mmm.
9:23 Mohamed El-Erian
That's what you get at the Bank of England. We didn't. We got one dissent. In fact, one of the big surprises is we only got one dissent.
9:25 Speaker A
Right.
9:26 Mohamed El-Erian
And and I think it's important to understand what happens in a group dynamic is that it you tend to iterate and converge
9:31 Speaker A
Sure.
9:32 Mohamed El-Erian
towards a view. And that unfortunately undermines the sort of cognitive diversity you need at turning points. There is a reason why the Fed has been consistently late. because they don't have the amount of cognitive diversity that they need to say what if. I thought Stephen Moran was was really interesting when he said, I'm not the smartest in the room, but I'm willing to ask the questions that other people aren't willing to ask. And I think that the Fed needs more of that.
9:59 Speaker A
But a a voice like Miron or whoever ends up being the the Trump-appointed uh nominee to replace Powell, how do you separate an earnest intellectual discussion from someone who is effectively a plant of the administration?
10:20 Mohamed El-Erian
So, look at the Bank of England. All the external appointees are people that have come either from economics or finance, that've come from outside the government, outside the central bank. It's understood they're going to serve one or two terms and go back to the outside. So they are technocrats. And then they join other people that have different backgrounds. And that's the whole point of cognitive diversity is you bring different viewpoints. And it's really important. My career has shown that when you have different viewpoints in the room and you can talk about it in a safe area, you get better outcomes.
11:09 Speaker A
All right, well we'll see if that happens. If there's any chance of that happening, especially before the turnover in the Fed chair. Mohamed, thanks so much for coming in.
11:15 Mohamed El-Erian
Thanks for having me.
11:15 Speaker A
Really appreciate it.
