The risk of a stock-market crash just shot up after Fed boss Powell signaled bigger rate hikes, Mohamed El-Erian says
- Fed boss Jerome Powell's latest comments boost the risk of a crash in stocks, Mohamed El-Erian has warned.
- US stock indexes tumbled after Powell signaled bigger interest-rate hikes than expected ahead.
Investors should be more wary about the risk of a recession or a crash in stock prices after Federal Reserve Chair Jerome Powell's latest comments rattled markets, top economist Mohamed El-Erian has warned.
The chief economic adviser at Allianz noted the dramatic selloff in US stocks that followed Powell's congressional testimony Tuesday. That shows the central bank had failed to properly signal its plan to keep interest rates higher for longer in a bid to tame inflation, he said.
"It really shouldn't be this way, and it doesn't need to be," El-Erian, a former Pimco CEO, wrote in a Bloomberg op-ed published Tuesday.
"Yet once again, remarks by Federal Reserve chair Jerome Powell fueled considerable volatility in markets that could risk both economic well-being and financial stability."
Powell told the Senate Banking Committee that the Fed could raise rates to a higher level than expected and then hold them there after inflation climbed to 6.4% and the US added 517,000 payrolls in January.
"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated," the Fed chief said.
The Dow Jones Industrial Average plunged to close 1.72%, or 574 points, lower on Tuesday after Powell's comments, while the benchmark S&P 500 stock index dropped 1.53%. The tech-heavy Nasdaq Composite lost 1.25%.
That selloff in stocks showed the market had priced in a rate hike of just 25 basis points at the Fed's next meeting in March, according to El-Erian.
It suggests the US central bank failed to communicate the possibility of a bigger increase, and that undermines its credibility and raises the risk of a crash, the economist added.
"Something is not right in all this," he said. "The whole point of the increased transparency adopted by the Fed in the last couple of decades is to allow for smooth economic and financial adjustments to policy regimes."
"The worst thing for policymakers to do is to dismiss Tuesday's market volatility as noise."
"There is something more sinister in play. The more this undue volatility occurs, the greater the risk of economic and market accidents."
The central bank eased up on monetary tightening in February, bringing in a 25 basis point increase after four consecutive 75-basis-point hikes in 2022. But Powell's comments suggest a 50-point rise is back on the table for next month.
"Rather than overwhelmingly pricing in an increase of 25 basis points as previously signaled by the Fed, the markets moved the odds in favor of 50 points, which would reverse the downward shift in hikes the central bank prematurely made just a month ago," El-Erian said.