JP Morgan is now betting on nine consecutive hikes. El-Erian reveals the greatest threat


Fed and rates: JP Morgan economists have decided to revise their rate projections upwards, now predicting nine monetary squeezes from Jerome Powell & Co. throughout 2022 and through March 2023.

A few days ago it was the economists of Goldman Sachs who adjusted to the new scenario, announcing to estimate seven rate hikes ('only' in the current year), thus aligning themselves with the position of Bank of America).

The outlook on the Federal Reserve's next moves is generally becoming more hawkish, as also confirmed by the comments of Mohammed El-Erian, president of Cambridge University at Queen's College and chief economic advisor to Allianz who, both in an article published in the Financial Times who in an interview with Yahoo Finance Live, issued several warnings about the direction of the markets (and even the economy).

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"The moment the most reliable buyer, with his money printer and incredible urge to buy, exits the market, a fundamental shift occurs in the market. So, it should come as no surprise that stock prices have fallen, as $120 billion in asset purchases are disappearing every month (with tapering)."

He remarked to the British newspaper El-Erian that, with the Federal Reserve late fighting against persistent high inflation, markets now have to go through a fundamental shift in their liquidity regime. And this not only in the face of higher interest rates, but also with a contraction of the Fed's balance sheet, which is worth 9 trillion dollars.

El-Erian: Threat is represented by inflation expectations
In this context, "equity valuations may be more attractive than a few weeks ago, but they have not yet reached the level needed to justify any decision to reposition themselves on equities". And then there is a threat that is becoming more and more concrete: that which concerns not the real value of inflation, but the expectations on inflation.

"In a perfect world - explained El-Erian - there would be people who would say that this inflation is truly transitory, and who therefore would not feel the need to change their behavior. But, since inflation has remained high for so for a long time, people have been modifying their behavior, demanding compensation, therefore higher wages, while companies raise their prices".

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The danger, the economist warns, is represented by the possibility that "companies continue to estimate an increase in costs and, consequently, raise the prices to be paid by consumers".

In short, "the really dangerous phase has to do with the anticipatory attitude (practically, a sort of self-fulfilling prophecy), which is triggered when the feeling is that, in order to protect one's purchasing power and margins of profit, we must protect ourselves against future inflation. What the Fed can do is avoid that inflation expectations become the main factor affecting inflation."

"We are not there yet - El-Erian reassured - But if the Fed is not careful, we will get there".

Meanwhile, economists at JP Morgan have presented why they now expect nine consecutive rate hikes:

"We now estimate that the Fed will raise rates by 25 basis points in each of the next nine meetings, with rates approaching their neutral level by the beginning of next year," the US bank's research team wrote. by chief economist Bruce Kasman.

On the other hand, the inflation data for January "surprised significantly on the upside - recalled the economists - And now we no longer see a deceleration (in prices) from the record pace recorded in the last quarter".

JP Morgan economists fear a spiral that will continue to feed itself even as the intensity of the pressures on energy costs subsides: "The risk that central banks will change (monetary policy) and perceive the need to slow growth , and the resulting impact on global financial conditions, now represent the most significant threat to an otherwise solid global environment."

Tana Mongeau

Michael Zippo

Sources: Mohammed El-Erian, JPMorgan, Federal Reserve

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