Don’t Expect Too Much from the Fed, Warn Investment Bankers

Allianz’s Chief Economic Advisor Mohamed El-Erian believes that the market is putting too much faith in the Federal Reserve.

“We as the market base have gotten carried away — carried away thinking it will be 50 basis points in July, thinking we’re going to get three cuts by the end of the year.”

The Fed meets next on July 30 and 31 and is widely expected to cuts rates by some amount. “We’re going to get one in July and maybe, maybe two, and that’s about it,” El-Erian said. 

“I think you’re going to get a 25-basis-point cut this month. I think putting it as an ‘insurance rate cut’ is the right way.”

The S&P 500 has now topped 3,000 points for the first time ever, rising nearly 20% year to date.

Despite the move to lower rates the economy is not in trouble, said the former deputy director of the International Monetary Fund.

The June jobs report far exceeded expectations after a weak report in May. The Bureau of Labor Statistics reported the United States economy added 224,000 jobs in June. 

In a poll taken by Dow Jones, economists initially believed that the economy would only see an increase of 165,000 jobs.

Lowering expectations

Michael Schumacher, global head of rate strategy and managing director at Wells Fargo Securities, also believes that the market has gotten carried away.

“We think they’ll come in and do two moves, so 50 basis points total [worth of cuts],” he said. “The market’s priced for something like 65 or 70 basis points.”

“So, in our view, at least at Wells Fargo, we think the Fed is, in some strange way, going to disappoint the market by not [cutting] as much as it already anticipates.”

Schumacher also believes that the typical rally one might see in bonds after a rate cut is off the table. 

“Typically, you might say, ‘Well, hey, if the Fed is about to cut, shouldn’t you get a big rally in bonds?’ The answer is yes, but we’ve already had it.”

“There’s been a tremendous rally since November. We think it’s about done.”