El-Erian Warns "The Fed No Longer Has Your Back"

Tyler Durden's picture

Authored by Mohamed El-Erian, op-ed via The FT,

In hiking rates and, more notably, reaffirming its forward policy guidance and setting out plans for the phased contraction of its balance sheet, the Federal Reserve signalled last week that it has become less data dependent and more emboldened to normalise monetary policy. Yet, judging from asset prices, markets are failing to internalise sufficiently the shift in the policy regime. Should this discrepancy prevail in the months to come, the Fed could well be forced into the type of policy tightening process that could prove quite unpleasant for markets.

Setting aside multiple signs of an economic soft patch and sluggish inflation, the Federal Reserve did three things on Wednesday that lessen monetary stimulus, only the first of which was widely expected by markets: It raised interest rates by 25 basis points, reiterated its intention to hike four more times between now and the end of next year (including one in the remainder of 2017), and set out a timetable for reducing its $4.5bn balance sheet.

These three actions confirm an evolution in the Fed’s policy stance away from looking for excuses to maintain a highly accommodative monetary policy — a dovish inclination that dominated for much of the aftermath of the 2008 global financial crisis. Rather, the Fed is now more intent on gradually normalising both its interest rate structure and its balance sheet. As such, it is more willing to “look through” weak growth and inflation data.

This evolution started to be visible in March when Fed officials worked hard, and successively, to aggressively manage upwards expectations that were placing the probability of an imminent rate hike at less than 30 per cent. With that, the hike that followed was an orderly one.

Yet, judging from market developments — including an implied probability of around 50 per cent for another hike this year and a generalised yield compression — traders and investors are resisting the Fed’s re-affirmed forward guidance. Instead, they are betting on the repeat of the past few years during which officials have tended to over-estimate the extent of policy tightening and, in subsequently reversing course, have converged back to the lower rate path implied by markets.

This time round, however, such questioning is more dubious given the evolution in the Fed’s policy regime. But it need not necessarily end in tears.

Maybe, just maybe, central bankers have a credible positive feel for what, until now, has been an unusually sluggish response on the part of productivity, wages and inflation. As such, they are confident that growth will pick up and that inflation will converge rapidly to their 2 per cent target.

Maybe they have better reason to believe that, working with Congress, the Trump administration will be able to deliver on pro-growth policies in the next few months. Or, maybe, they see comforting signs of a stronger global reflation that others are missing.

While hopeful, these are unlikely to be the main reasons for the current discrepancy between the Fed and markets. More likely, the central bank is now focusing more on excessive risk-taking by investors and traders, including its potential negative impact on the economy down the road.

In yet another unusual twist, the latest Fed rate hikes were accompanied by a loosening, not tightening, of financial conditions. But rather than lead to higher economic activity and inflation, this has fuelled even more exuberant risk-taking, with stocks and corporate bonds decoupling further from economic and corporate fundamentals. The longer this continues, the greater the risk of a sudden sharp market correction that could damp both consumption and investment.


Markets would be well advised to pay closer attention to the forward guidance. This is an evolving Fed that, absent a major economic downturn, will maintain a more hawkish tilt to monetary policy. And, while it is well ahead of others, it is not the only central bank undergoing such a transition. The Bank of England is also itching to tighten policies despite a weakening economy and Brexit uncertainties, and the European Central Bank may soon be compelled to follow.

The longer markets discard the Fed’s reconfirmed policy guidance, the greater the potential for asset markets to be disappointed by a central banking community that is shifting from being best friend to becoming a lot less supportive.

And should the Fed be proven wrong by a significant slowdown in the economy, markets would have little to cheer on that account too given the extent of the recent liquidity-driven rally...


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kliguy38's picture

Another globalist tool.....don't believe him.....if he says up then its down......blah blah blah...they're just trying to take some air outta da market.....they know they're blowing the mother of all bubbles......

Squid Viscous's picture

never trust a goat fucker, especially when he is going for the tom selleck mustache

GUS100CORRINA's picture

Chart says: Fair value for SP500 between 1700 and 1800. Sounds right to me.

What to buy? SDS or put spreads or ????

johngaltfla's picture

Old Mo is full of shit.

The Fed will be buying up assets like Bill Clinton with a million bucks on Lolita Island soon.

You just have to know which assets to own so you don't get AAPLfucked.

AllOfGood's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.jobproplan.com

Economiffed's picture

Actually he is THE guy you should take seriously. He hones his skills at Pimco. After he left, the company went to shit. The CEO was fired blah blah blah... truth!

Central banks actually listen to this guy. I am saying they implement what he says but they do listen!

buzzsaw99's picture

"There must be some kind of way out of here",
Said the joker to the thief...

E5's picture

lone wolf howl



...jump starbuck jump!

Bigly's picture

The Fed never had MY back...ever

venturen's picture

Is your butt on your back....because they have that

khakuda's picture

Basically, the Fed blew it.  They waited too long and moved so tenously and slowly that no one believes them.

venturen's picture

"blew it" what do you think they consider success....a successful middle class...or rich bankes to pay their speaking fees?

bobert727's picture

That sounds very much like just before that last finacial implosion.....remember Greenspan and his 1/4 point rate hikes? Too little too late back then too!

any_mouse's picture

El-Erian is one of the club that benefited from the FED.

The FED never had my back.

Bill of Rights's picture

Added a boat load of UVXY $9:43.... I can wait it out

any_mouse's picture

Right. Sure. Smart move. Keep buying the constant decline.

Crypto-World-Order's picture

Thats a great plan. I think ill do the same here shortly.

shizzledizzle's picture

Good luck. UVXY does not perform as advertized. It's only 3 times on the losses. Under $10 it's about due for another reverse split. 

Like I said before about UVXY... When you're wrong you're wrong and when you're right you're wrong.  

Barney08's picture

It's the melt and decay that kill you. ProShares are worse than any bookie. At least broken fingers heal. They are a criminal enterprise.

Fahq Yuhaad's picture

How to say fuck all in 520 words. Rivals that other creep - what was his name - Marc to Market?

EmmittFitzhume's picture

"$4.5bn balance sheet."  


I think Yellen has that much in her granny panties

Seasmoke's picture

Used to be millions and billions. People have now lost the difference between Billions and Trillions. That's how bad it's become now b

order66's picture

If the stock market goes, everything goes. That's all you need to know. The Fed will act accordingly as will all the other co-ordinated central banks.

"they are confident that growth will pick up and that inflation will converge rapidly to their 2 per cent target."

They could do that now since the calc being used to determine inflation is using erroneous data that they influence. All they need to do is give more weight to certain areas that are clearly hyper inflationary (ie: rents)

The Toothman's picture

The funny thing about my back is that it's located on my cock...


Seasmoke's picture

Good. Now Mr. Yellen can't stab me with a knife in my back. Fuck you Yellen !!!!

buzzsaw99's picture

the s&p farts in el erian's general direction. so does the 10Y.

order66's picture
Shiller P/E: 30.3 (+ 0.83%)

Shiller P/E is 80.4% higher than the historical mean of 16.8
Implied future annual return: -2%

TeethVillage88s's picture

What the hell is he talking about. Is this fear of change from El Erian? Control freak?

"...market developments — including an implied probability of around 50 per cent for another hike this year and a generalised yield compression..."

- 10 years of Rate Cuts is just too much for the big and small
- Maybe 50 years of rate cuts is what he is looking for here?
- Bond Kings are actually wimps
- Used to big Bonus money are we, El Erian?

InnVestuhrr's picture

Q: Why the abrupt change in FED policy ?

A: The deep state has decided that the economy and financial markets MUST crash under Trump's administration.

Juggernaut x2's picture

Trump should distance himself from the coming economic shitstorm- of course he is too dumb to do so

Totally_Disillusioned's picture

Actually, he's using their rules and tactics to bring it down around their heads.  "to dumb"?   Stupid is as stupid dies...

roadhazard's picture

But no, everything is all good because of Trump. Just ask him and if you don't he'll tell you.

pc_babe's picture

Ive asked before, Ill ask again, what parallel Universe do you sh*t in?

In.Sip.ient's picture

Next time somebody posts how the FED has

"lost it" and the markets will crash and burn

if they don't QE and ZIRP...


Post the US$ /BtC chart ( monthly is probably

enough to get the point ) along with the article.


Hint... the block chain is unstoppable competition

for fiat... fiat either competes... or dies...


LULZ all around.  Hows that for a rock and a

hard place for yah?


onthedeschutes's picture

"The Fed no longer has your back" - and neither does El-Erian

Tonterias's picture

Buy the Goldman-Fed dip!

Is it difficult?

venturen's picture

FED up for crimes against Humanity. Where in the FN consitution does it say stock manipulators should be rewarded by a central bank printing money?


One of the worst periods in US history easily on par with the civil war at least then...we were fighting for the right thing. Now we just reward rich criminals...by POLICY!

Totally_Disillusioned's picture

Will we see the perp walk or will Nibiru take care of them?  Either way the Lord will have his way.  He's warned them "Tekel".

lester1's picture

The Fed wants to crash the markets to fuck President Trump so he only gets 1 term!!

Totally_Disillusioned's picture

Really? I'd say since Breton Woods conference July 1–22, 1944 as a mechanism for the central bankers to continue making money even after the war effort was nearing an end.  They have it covered on both ends - feed the industrial military complex with war and in peace profit from credit/debt.  Then they got greedy and did both!  They're circling the drain at this time.

whatisthat's picture

I would observe regardless of what el-Elian posts, the markets will continue to be manipulated by the corrupt establishment....

ali-ali-al-qomfri's picture

my back is fine, but my wallet is missing.

mo mule's picture

Now none of this matter's. Russia has had it, next time they are going to hit us with a S400 and WW3 will be on in earnest. Tip for tat, nukes fly, what market? 

Stick in the Mud's picture

Of the G-3, only Japanese central bank and the ECB have been adding to their balance sheets since early 2016 (not the Fed). Their asset purchases and the movement of Amazon suggests (to me) that Fed tightening will accomplish little if other central banks continue or expand QE, yes?

pizdowitz's picture

The FED has your back until AAPL hits $400 .

Smoke this...

saveUSsavers's picture