Top economists: The Fed will pause rate cuts for a long time and should theoretically raise rates

Odaily reports that Mohamed El-Erian, former CEO of Pimco and current Dean of the University of Cambridge's Queens' College, stated that the Federal Reserve may not cut interest rates "for quite some time" and may even tolerate higher inflation to protect economic growth, in the face of surprisingly high inflation data. El-Erian pointed out on Wednesday that if the Fed was truly committed to its 2% inflation target, it should theoretically be raising rates now. However, the reality is that the Fed is more likely to keep rates unchanged and tolerate higher inflation to preserve economic momentum and the "exceptionalism" of the US. Due to higher-than-expected US inflation, bond traders have pushed back their bets on the Fed's next rate cut to December. Swap contracts related to the Fed's future decisions have been repriced after the January CPI exceeded expectations. The market had previously expected the Fed to cut rates before September. The new rate level implies the market is betting on the Fed cutting rates by only 0.25 percentage points this year. Regarding the January CPI data, El-Erian admitted that "on the surface, this is not good news for the Fed. They will continue to reassure the market that everything will be fine, but I think the pause button will be pressed for longer than the market expects." El-Erian criticized Fed Chair Powell and his colleagues for overreacting to economic data and conveying confusing forward guidance to investors, exacerbating market volatility. He bluntly stated that "this Fed lacks a strategic anchor, they have not provided meaningful forward policy guidance, which is a major failure." He added that the hot inflation data is not an "outlier" as it is consistent with other economic data. Furthermore, the report shows that businesses and consumers are now more sensitive to actual and expected cost increases. He said, "This is a different economy," hinting that the US economic condition has changed from before. Economists at Bank of America, including Aditya Bhave, said the January CPI report has strengthened their confidence that the Fed's rate-cutting cycle has ended. "Raising rates now doesn't seem so unthinkable," they wrote in a report after the data release.