BBO Columnist Mohamed El-Erian Talks CPI Report

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We begin with our top story, the latest CPI print boosting expectations for a twenty five basis point come from the FED next week. Muhammad al Aeron of Queen's College, Cambridge writing on X that he sees a quote ankorless paradigm, one that is crying out for the stabilization influence that usually comes from a dominant economic narrative rather than the current ping pong one and or forward policy guidance as

What was that about?

So we saw a twenty basis points round trip in the two year. Twenty basis points. That's a lot for that maturity, and we learned two things. One is that we have excessive data point dependence. All that happened yesterday in the infation report, as people know, is that monthly core came slightly harder than expected. Everything else was aligned, and yet we move ten basis points up.

And then we.

Discovered a second technical, which is money on the sideline being put to work quickly, and that I think is our reality, is that we don't have a dominant economic view, so we get swung all over. But the stabilizer right now is this technical of cash on the sideline. Now, financial conditions are good stabilizers with two very important qualifications. They are volatile and they have as much perception as reality.

You could argue that even in the face of all of this volatility, it shows how strong the economic system is that there wasn't some sort of significant disruption. Isn't that sort of the ultimate stress test that when the benchmark rate swings around by twenty basis points you don't see any massive selling, Why is it more pernicious than it might seem on the surface.

So I do think the financial system has been strengthened and in particular the banks, and we are in a much better place than we were in the past. So you don't get the massive balance sheet effects. You don't get the sort of virtuous cycles good the cycles good

I was surprised at Jackson Hall to your point, there wasn't more of a discussion, at least not out loud, about what the neutral rate is. Essentially that sort of paradigm shift that you're looking for, some sort of real discussion of what this Fedure Reserve is willing to accept in terms of inflation and a benchmark rate. That's it sounds like they just don't agree on once. So how can they come up with one if they don't really

So, as usual, you're getting me to front run my financial times of at.

Tomorrow, that's what you hear. Film.

That's so I think, Lisa, you're absolutely right. But it's not just that we don't know what the destination is. We don't know what the journey is.

We don't know.

What risk mitigation mindset actually means operationally. And also there's disagreement as how quickly will FED official go from backward looking data dependence to forward leaning. So we have these disagreement both within the FOMC and also between the market and the end what seems to be the consensus if there is one on the FED. So this is for me, it's a fascinating time, but it is also a very confusing time.

So amongst all those confusion, what do you want to hear from Jpowell next week?

So what I'd like to hear and what I expect to hear, is that he's going to cut by twenty five basis points. Beyond that, it's more what I'd like to hear than what I expect to hear. I'd like to get a sense of where he thinks the neutral raders. I'd like to get a sense of where he sees the balance of risks. The market right now has modeled the FED as a single mandate FED maximum employment. FED official tell us no, no, no, we're do mandate FED.

Do you want to hear more descent within the Fed? Yeah?

I would like. I mean I admired the Bank of England. The last decision was five to four. You had a situation where it was six to one. I think that's important because that conveys the uncertainty. Yes, they should have more descent. I think they viewed dissent as weakness. Most of us view dissent as having a really important information content that has to be priced into markets.

I remember a series of votes at the Bank of England, maybe a decade or seagam, So you remember this take when the committee was out voting King a governor.

King was leading the central Bank. Think of the time.

He wanted to win trees QE and you had people on the NPC voting against him. Not only that, there were more people voting against him than voting with him. That's a scenario we don't see at the Federal Reserve. You had a warning coming into the September meeting, and I remember it at the start of summer. You wanted them to reduce interest rates in July, but you acknowledged that the difference between going into September versus July wasn't

Was that what we got yesterday? How distracted might they be?

I don't think that much, because it was just one element in a broadly consistent data release that certainly was very close to consensus forecast. But if we had missed on headline, if we had missed on core, if the base effects weren't as favorable as they are right now, you would have seen a total mess in the marketplace.

So that was my.

Concern is that, as much as they don't want to admit it, they are not just data depending, their single point data dependent, and that's pretty scary for policy setting.

That's certainly how the market sees it, because it guarded the conversation away from fifty and back towards twenty five. How do you think they'll look to frame this rate cup when they deliver it a week yesterday. Will they call it a mid cycle adjustment? Will they say it's the beginning of a journey back to neutral, whatever neutral is.

How do you think they're going to frame this decision?

I suspect it will be what's called the Dovish twenty five base points, which means this is the first of many, and we may we may be inclined to go even more if the labor market weakens. There was this phrase in the Jackson Hall speech that was really important. We don't want to see the labor market get any weaker. That is a very strong statement from the fair chair. Whether everybody else is there, we don't know.

Let's say they do what you want and they come out they see, this is what neutral is, this is our journey, this is our mandate, this is what we're going to do. And how much have they lost control of the plot anyway, just simply because there are other factors at play. You think about, for example, fiscal coming out and potentially disrupting things, Think about international investment with an auction that's necessarily negative, that kind of forces their hand.

So they certainly should be incorporating fiscal They must be doing this. They certainly should be incorporating q QT. I mean, we haven't talked about qt QT is ongoing on that. They should certainly should be doing that, and that should be reflected in what they say. I hope they're doing this internally. I just think they got so burnt in twenty twenty one because they did take a forward leaning view and they were completely wrong. That they don't want to make another mistake.

What if they say this is a victimless crime. We're not seeing a problem from this that essentially they're getting it right, and the markets are generally you hear traders actually say, actually, Powell is doing a pretty good job, so why should they change it?

What would your argument, Well, first we go back to the amount of volatility we've had in fixed income.

It has been unusual, Lisa, I know, I know. I watched it every day.

We were talking yesterday.

It was crazy, okay, and that has adverse external effects. It undermines also the credibility of the US as the benchmark for many others, and we are in a world in which countries are building little pipes around the US. We don't want to enable that process further. That's the first issue. The second issue is we have a major reconciliation in our future. We have the treasury part of the fixed income market that is signaling quite a high

I'm sitting here laughing because we need to kind of find what you said. Market participants that think Powell are doing a great job. They're the bullish once. Yes, let's be very clear about that. Actually are still near all time highs. If we weren't there, I think they'd have something different to say about where we were.

Maybe their data point depending as well.

Yeah, there's data point is the S and P five hundred. You mentioned where the bond market is and where markets are and how their price they want to pick up on the amount of demand we've seen for some issuance.

We had a Guild issue last week.

Record order Book had an Italian issue this week record order book. We've seen a similar dynamic in US high grade corporate debt in America, particularly last week, two very busy days, lots of demand. Credit spread said very very tight. Can you reconcile what each part of the fixed income market is talentis right now and whether you can make sense of it?

And we had yesterday a treasury auction with massive indirect demand. I can only reconcile it by the tone of cash US on the sideline and the fear that if you don't get into and lock industrates now, you will lose interest income in the future. So every time we have a backup in rates, people rush back in. I mean, yesterday's dynamic was fascinating for me, that the speed of the round trip was significant.

We've seen it a few times, and then last week Mohammed, We're lucky to have you