The specific risk today is that, wishing to avoid unsettling market volatility, the Fed validates the market loosening with sizeable rate cuts but then is forced to reverse course later.
“It turns out that inflation was transitory after all; it just took longer.” Such a view is being heard a lot following the sharp fall in US CPI inflation from a high of 9.1 per cent in June 2022 to its latest November reading of 3.1 per cent.
Yet, it is an interpretation that is misleading, and it is one that puts even more pressure on the US Federal Reserve to prematurely pursue big and early cuts in its policy interest rates.
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Financial Times
Mohamed A. El-Erian, is president of Queens’ College at the University of Cambridge and a professor at the Wharton School of the University of Pennsylvania
