Top economist Mohamed El-Erian predicts stocks will remain volatile — and warns the Fed's rate hikes could hammer the economy
- The Fed risks hurting the economy by rapidly hiking rates and axing support, Mohamed El-Erian said.
- The Allianz economist criticized the central bank for taking so long to begin curbing inflation.
The Federal Reserve risks choking the US economy if it withdraws support too quickly, Mohamed El-Erian warned in a CNBC interview this week. Allianz's chief economic adviser also predicted US stocks would remain volatile, serving up bargains for opportunistic investors.
"I question whether the economy can take seven rate hikes with quantitative tightening on top of that," El-Erian said, referring to Bank of America's forecast of seven interest-rate increases this year, and the Fed's plan to taper its bond purchases and shrink its balance sheet.
"I'm worried as to whether it's going to absorb it," the economist added.
El-Erian accused the Fed of dragging its feet and belatedly trying to curb inflation and cool down the economy. He underscored the striking disconnect between inflation hitting 7% in December, and the central bank continuing to pump liquidity into the economy.
The former PIMCO CEO asserted that corporate earnings and behavioral conditioning have underpinned the stock market in recent weeks. In other words, investors still feel good about their portfolios because company profits have been strong, and they've been rewarded for holding stocks and buying market dips throughout the pandemic as stocks have marched higher.
However, El-Erian told CNBC he expects stocks to remain volatile, as the market is less liquid than many people thought.
"Look at Facebook — who would have imagined you could wipe out $200 billion of valuation in a few hours?" he said. "Look at what happened with Amazon," he added, noting the dramatic swings in those two technology stocks were especially unusual given the two companies' huge market capitalizations and massive trading volumes.
El-Erian advised investors to be careful, pick a handful of high-quality stocks they want to own, and buy them at a discount during outsized market declines.
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