Ahead of schedule: Why the Fed should cut rates in July, according to Mohamed El-Erian

• The Fed should start cutting interest rates in July, but likely won't, Mohamed El-Erian said.
• "We've had nothing but negative surprises," he told Fox Business.

While markets dissect economic data points to determine whether interest-rate cuts will come this fall, Mohamed El-Erian says there's enough to support cuts in July.

In an interview with Fox Business on Tuesday, the prominent economist cited a slew of cooling indicators that would support a Federal Reserve policy easing next month.

"We've had nothing but negative surprises," he said. "All that is saying to us is that the economy is slowing much faster than most people expected, including the Fed."

To back the point, El-Erian referenced disappointment in recent retail sales, as well as production data. Just this week, lower-than-expected results on the ISM Manufacturing index caused stock markets to stumble, followed on Tuesday by an underwhelming job vacancies report.

He also listed Wednesday's service sector data as a crucial metric to watch. The ISM Service index ended up beating estimates, rising to 53.8 in May.

Though his comments preceded the results that have since come out, he noted that the sector is a big driver of inflation, as well as growth.

Few, including El-Erian, actually expect the Fed to cut in July, even if it's called for.

Futures markets are currently indicating that a policy pivot is most likely to start in September instead, and odds of a summer rate cut stand at only 18.5%.

In his view, the Fed will keep waiting as it's too reliant on data that reflective more of the past. For instance, that's as Fed Chairman Jerome Powell prefers to focus on three-month moving averages, as opposed to month-to-month changes.

"Monetary policy acts with a lag," El-Erian said. "You are really targeting the economy of tomorrow; but if you do that based on yesterday's data, you're likely to get it wrong."

El-Erian has also been an ongoing proponent of shifting the Fed's inflation target up to 3%, as opposed to the 2% rate the central bank is devoted to achieving. He's previously warned that the Fed risks damaging the economy by keeping rates elevated for too long.

The economist would prefer that the Fed cut three times this year, but realistically expects no more than one or two cuts.