El-Erian: Fed’s Powell Is Keeping Investors in the Dark

Federal Reserve Chairman Jerome Powell’s news briefing this week blew it, failing to provide a clear road map to the Federal Reserve’s plans for tightening monetary policy.

And that bugs Mohamed El-Erian, Allianz’s chief economic adviser. “The market wants greater clarity,” he said in a CNBC interview. For instance, he added, “People want to know how the balance sheet will contract.”

Powell left a lot of unanswered questions lingering on Wall Street. When asked about the pace of rate increases at his Wednesday appearance, the Fed chief would say only that the central bank’s policymaking panel needed to be “nimble.” He also said that body had “quite a bit of room” to raise interest rates and not harm the labor market.

The market took that to mean Powell is looking at more than three quarter-point hikes in the benchmark federal funds rate this year—what the committee, in its “dot plots” poll, predicted was the policy by which tightening would proceed. But after the Powell news confab, futures contract expected up to five increases this year, according to CME Group.

Powell also provided no details on how the bank will diminish its $9 billion balance sheet, which has swelled thanks to the institution’s bond-buying program. The Fed is reducing its purchases and intends to finish the buying drive by March; while it has indicated a desire to reduce the enormous bond trove, no specifics have emerged.

The Fed could simply let its stash of bonds expire without rolling them over—

reinvesting the proceeds of matured bonds has been its practice. Or it could actively sell the paper. Selling its bonds likely would depress fixed-income prices and push up yields, which happens to be what the Fed wants.

“The Fed missed a golden opportunity to catch up with realities on the ground. Instead, it has fallen further behind,” El-Erian said. Investors are leery about what’s next, he explained. The S&P 500’s continued slide after Powell spoke seems to support that assessment.

“The market has recognized that the liquidity regime is changing, but [it’s] not clear on how it’s changing,” El-Erian said, referring to the rapid-fire volatility of stocks lately, driven by uncertainty about the Fed’s efforts to quell rampant inflation. “That’s what the market has got to adjust to—that inflation will no longer allow the Fed to be our best friend forever.”

Clearly, Powell has abandoned his previous stance that higher inflation—the December Consumer Price Index (CPI) showed a yearly rise of 7%—was no longer transitory. But El-Erian was displeased that the chair wouldn’t elucidate further.

“Inflation won’t go away rapidly,” the economist said. “In six months, we’ll still be talking about it.”