Hike rates

Fed could hike rates 100bp after hot CPI reading: El-Erian

  • June’s hot CPI reading of 9.1% will force the Fed to react aggressively, Mohamed El-Erian said in the Financial Times.
  • According to the top economist, a 1 percentage point hike could be on the table for this month’s meeting.
  • “Be in no doubt: the latest inflation numbers are indicative of rough seas ahead,” El-Erian said.

June’s inflation reading hit its highest level in 41 years, leaving the


Federal Reserve

no choice but to raise interest rates aggressively, opening the door to a potential 100 basis point hike this month, said top economist Mohamed El-Erian.

In a Wednesday column for the FinancialTimeshe said the 9.1% jump in the consumer price index will further erode central bank credibility after policymakers were previously so adamant that high prices were transitory.

“The Fed has no choice but to react aggressively,” wrote El-Erian, economic adviser to Allianz and Gramercy. “It is safe to raise interest rates by 0.75 percentage points later this month and may well be looking at a 1 percentage point hike.”

The Fed meets on July 26 and 27. It has already hiked rates by 25, 50 and 75 basis points in previous meetings this year, meaning a 100 basis point hike would mark another acceleration in the tightening.

But such a steep rise and the delayed political reaction increase the risk of


recession

he noted, especially as economic activity is already slowing.

And while inflation is expected to decline over the next few months, the CPI report showed that price pressures continue to widen, El-Erian added.

“As such, and especially if the Fed fails to regroup quickly, it would be foolish to rule out the possibility of a third wave of inflationary pressures that would interrupt and reverse the downward movement of the next three months,” El-Erian said. wrote.

As the high inflation reading pushes the Fed to be more aggressive, the implications will ripple out to other global economies and uncertainty will linger.

The economist argued that June’s hot reading will add to the phenomenon of so-called “small fires everywhere”, especially in developing countries.

“Be in no doubt: the latest inflation numbers point to rough seas ahead, especially for the most vulnerable segments of society in the United States and around the world,” El-Erian said.