Mohamed El-Erian tells us 3% growth is within reach in the US as long as it sidesteps 3 risks
- Allianz Chief Economic Adviser Mohamed El-Erian tells us he sees US economic growth reaching 3% on a sustained basis as long as policymakers stay the course.
- "I see economic growth picking up toward the 3% level, if not beyond that, provided the economy continues to sidestep the triple risk of a major geo-political shock, a policy mistake, and a huge market accident," he said.
- El-Erian believes the Federal Reserve will raise interest rates three more times this year.
The US economy can achieve 3% growth if a solid mix of economic policies is implemented and sustained - as long as it avoids major disruptions in global geopolitics or financial markets, Allianz chief economic adviser Mohamed El-Erian told Business Insider.
Given the dramatic slump in global stocks and huge spike in volatility over the last three trading sessions, those may seem like major ifs. But for El-Erian, a veteran market and Fed watcher, "the key question facing the stock market is the speed, extent and orderliness of the transition from what has been primarily a liquidity-driven process to one that is better underpinned by improving fundamentals.
"This transition is key for a 'good convergence' between the elevated asset prices and underlying fundamentals," he said.
So what's the source of El-Erian's underlying faith in a strong economic outlook, which he believes will allow the Federal Reserve under the new leadership of Jay Powell to raise interest rates three more times this year?
The US economy's underlying resilience, which has weathered quite a year of political uncertainty, in part with help from stronger growth overseas.
"I see economic growth picking up toward the 3% level, if not beyond that, provided the economy continues to sidestep the triple risk of a major geo-political shock, a policy mistake, and a huge market accident," he said.
"And it is a phenomenon that could extend beyond the short-term if the pro-growth policy momentum builds further. Indeed, for the first time in quite a while, the US economy has significantly brighter prospects for putting in its rear view mirror too many years of the 'new normal' of low and insufficiently inclusive growth. Meanwhile, the improved economic outlook internationally is helpful for the US but is not the driving force."
Fed policy and uncertainty surrounding wage growth
The market's troubles began with sudden worries about a spike in wages after a strong showing in the January jobs report, even though that's exactly what workers have been lacking for much of the recovery. That means figuring out the market's direction - and the Fed's likely response - hinges on understanding the complex relationships between unemployment, inflation and wage growth.
The Fed has undershot its inflation target for almost the entire economic recovery despite a falling unemployment rate that now stands at a 17-year low of 4.1%. The central bank has raised interest rates five times since December 2015 to a range of 1.25%-1.5%. Investors have recently started to bet the Fed might become more aggressive in tightening monetary policy if inflation, long dormant, suddenly spikes. Many previous such warnings have proven premature, in part because of depressed wage growth.
"Many economists and policymakers have been puzzled by at least three basic relationships that no longer seem to follow historical behaviors and modeling - that is, the relationship between unemployment and wages, the [low] productivity puzzle and what former Fed Chair Yellen has called the 'inflation mystery,'" El-Erian said.
"These three uncertainties are at the center of understanding and predicting how the economy and certain financial variables will durably evolve. And they provide important policy insights."