El-Erian says Fed’s higher-for-longer rates U-turn is at odds with market

The Federal Reserve’s delay of interest-rate cuts in a bid to temper inflation runs the risk of falling behind the curve, according to Mohamed El-Erian.

“The Fed pivoted on the basis of data. It was the opposite of the pivot that they did in December — now they have to do a U-turn,” El-Erian, the president of Queens’ College, Cambridge, told Bloomberg Television on Friday. “As they are doing the U-turn and stay higher for longer, the market is going the other way.”

“The Fed is going to have to pivot — not on the basis of inflation numbers, but the basis of the real economy,” he added.

Like other market watchers, El-Erian has previously raised the possibility that the U.S. central bank should look beyond its 2% inflation target in a new era of structurally higher pressures on price growth.

“Is the inflation target the right target? We all talk about wanting to go back to 2%,” El-Erian said. “Two percent is totally arbitrary. If we are pursuing the wrong inflation target, the risk of a mistake — that mistake would mean sacrificing growth unnecessarily — the risk of a mistake is high.”

“It’s a world that’s subjected to higher inflation. And we’ve come from a world that was subject to lower inflation,” he added.

On Wednesday, Treasuries rallied after a reading of consumer prices showed that headline growth eased in April, with investors bolstering wagers that the Fed will ease by as many as two quarter-point cuts come December. But inflation reports have also illustrated that for some areas of the service economy price growth is proving harder to tame.