We reached out to Mohamed El-Erian to ask him what’s missing from the media coverage of this week’s Federal Reserve statements. Here is what he told us.
Both general and specialized media outlets (including the front pages of the Financial Times, the New York Times and the Wall Street Journal) have provided quite comprehensive coverage of this week’s policy signaling by Fed officials which, yesterday, culminated in quite explicit messages from the top leadership (Chair Janet Yellen and Vice Chair Stanley Fischer). The result has been to – quickly and dramatically – re-price the fixed income markets to reflect a much higher probability of an interest rate hike when the FOMC, the highest policymaking committee at the central bank, next meets on March 14-15.
Having said that, there may well be something that, at least as of now, is not getting enough attention in the otherwise comprehensive media coverage of Fed signals: that is, an ongoing and gradual shift in the Fed’s policy regime.
If so, here are three quick things to keep in mind:
After years of pursuing a highly tactical policy reaction function – popularized by the (so-far correct and applicable) characterization of the Fed being “data dependent” – central banking is likely to evolve to include a bigger strategic input into policy design.
In doing so, the Fed will be hoping to provide more of an anchor in a world in which other elements of policies (such as the budget, tax reform, de-regulation, trade policy, infrastructure spending, etc.) have become a lot more fluid. Indeed, this is quite a change from the last few years when the Fed was the de facto “variable” while other elements of policies were “constants” due to their paralysis by political gridlock.
With this comes a gradual shift in the Fed’s relationship with financial markets which will see it gain confidence in leading investors and traders rather than react to them. And if you are wondering about the Fed’s power to influence certain segments of the bond markets, just ask traders who have just gone through a week of upheaval … and one that led to more than a surge in yields on shorter maturities Treasuries; it also diminished, at least for now, what has been a strong downward force on US yields coming from political risk in Europe.
In shifting policy regimes, the Fed wishes to remain part of the solution to overcoming America’s challenge of low and insufficiently inclusive growth, rather than slip into being part of the problem. But the success of this transition – and, therefore, what it means for markets overall – is not just a function of its own behavior. Quite a bit will depend on how the Administration and Congress come together on the careful design and the timely implementation of pro-growth policies.
Mohamed A. El-Erian is the author of two New York Times Bestsellers: “When Markets Collide” and “The Only Game in Town.” A former Deputy Director of the International Monetary Fund, he is chief economic advisor to Allianz, the corporate parent of investment management firm PIMCO where he served as CEO and co-CIO (2007-14).
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