US Interest Rates to Pause Until Year-End? Allianz: "Inflation to Peak in June-July"

▲ United States, Federal Reserve (Fed)/AI generated image

US consumer inflation expectations jumped to their highest level since September 2023. However, the market expects the Federal Reserve will neither cut nor raise interest rates for the remainder of the year. The judgment is that there is no reason for the Fed to rush to act, as the worst phase of price increases has passed and the economy is in good shape.

Mohamed El-Erian, Chief Economic Advisor at Allianz, stated in an interview with CNBC on July 7 (local time) that he expects "no interest rate cuts or hikes for the rest of the year." Consumer inflation expectations compiled by the New York Federal Reserve reached their highest level since September 2023, with rising healthcare costs and rents cited as key concerns.

El-Erian said, "I think the worst of inflation is behind us," adding, "The peak of this cycle will appear in the June or July indicators." He explained that while the remaining inflationary pressures mainly come from artificial intelligence (AI), unlike past oil prices and tariffs which put negative pressure on the supply side, AI also brings positive supply effects. He further emphasized, "The Fed can handle this trend," and "They just need to observe the situation without any reason to cut rates too early. The economy is also in a good position right now."

He also offered the diagnosis that a greater change than what is happening in the market is occurring within the Fed. El-Erian assessed that reform and modernization have emerged as key agendas in the transition from the Powell-era Fed to the Warsh-era Fed. He mentioned the shift from forward guidance-centric policy to policy framework-centric guidance, stating, "The market is only looking at interest rate forecasts right now, but the actual changes are much larger."

El-Erian also argued that breaking the excessive interdependence between central banks and financial markets is positive for the market in the long run. He pointed out that the interdependent structure grew into a problem in 2020 and 2021, and almost all assets struggled in 2022. He added, "While volatility might increase somewhat as forward guidance diminishes, it is a good change for the market in the long run."

El-Erian analyzed that the economic order is shifting from an era centered on efficiency and open markets to a geoeconomic era prioritizing geopolitics and economic security. He stated that tariffs and payment systems are being used as strategic tools, and industrial policies are becoming aggressive, implying that the performance of businesses and economies will be more influenced by geopolitics, domestic politics, and national security, not just commercial judgments. He also argued that free markets did not adequately reflect distribution issues during globalization, specifically claiming that China exploited the benefits of globalization without fulfilling its obligations within the international system.

[Article Summary]

-Mohamed El-Erian predicted that the Federal Reserve would neither cut nor raise interest rates for the remainder of the year.

-El-Erian assessed that the peak of inflation could appear in the June or July indicators, and AI is key to the remaining inflationary pressures.

-He analyzed that Fed reform and the spread of geoeconomics are larger structural changes than interest rate forecasts, and that the economic influence of geopolitics and national security is expanding.

*Disclaimer: This article is for investment reference only and does not take responsibility for investment losses based on it. The content should be interpreted for informational purposes only.*