It seems like not a week goes by without President Donald Trump criticizing the head of the Federal Reserve, but one top economist thinks there could be merit in one of Trump’s favorite descriptors of Jerome Powell: “Too late.”
Mohamed El-Erian, the chief economic advisor at Allianz, thinks the idea that Powell may be too late to cut interest rates is credible.
Speaking to CNBC on Wednesday, El-Erian — who’s often warned about the risk of a recession in recent years — said he believes the Fed should have cut rates last month.
“Now we’re starting to see the problem with excessive data dependency,” El-Erian said of the Fed Chair. “If you simply look at data, by the time you get a clear indication of what you should have done a few months ago, it’s too late.”
Inflation data has been mixed recently, which has complicated the Fed’s path toward cutting interest rates. Inflation was slightly cooler than expected in July, with consumer prices rising 2.7% year-over-year. However, producer prices came in much hotter than expected, growing 3.3% compared to levels last year.
But while inflation is ticking higher, expectations for price growth are mostly anchored, thanks to supply changes in the economy, El-Erian said.
The job market, meanwhile, is flashing signs it’s starting to deterioriate at a faster pace, he added. The US added far fewer jobs than expected in July, while job gains over May and June were revised downward by a collective 258,000.
All eyes on Powell
Markets are waiting on the minutes from the Fed’s July meeting, which will give insight into what the central bank thinks about inflation and the outlook for Fed rate cuts.
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Powell’s approach to monetary policy has differed in recent years from past Fed Chairs, El-Erian said. Alan Greenspan, who served as Fed Chair from the late 80s to the early 2000s, didn’t raise interest rates as inflation ticked higher in the 90s partly because he saw productivity booming in the US, which was “absolutely” the right call, El-Erian said.
Ben Bernanke, who took over the central bank in the years leading up to the Great Financial Crisis, also waited to raise interest rates as inflation rose in the early 2000s as he saw the economy slowing, El-Erian said.
“This is the first Fed Chair that is almost wholly backward-looking. And that’s the problem,” he added.
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Powell took a strategic view on monetary policy during the pandemic, El-Erian said, when the Fed Chair kept interest rates close to zero and said price pressures in the economy would be “transitory.” Inflation peaked the following year at over 9%, prompting a series of aggressive rate hikes.
Trump, who appointed Powell as Fed Chair in 2017, has pressured the central bank to cut rates for years.
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“They made a huge mistake,” El-Erian said. “They may end up making a mistake by being too late,” he added, when asked if the Fed was poised to make another monetary policy error.
His comments echo what Trump has frequently said about Powell. The president, who’s pressured Powell to lower interest rates for years, doubled down on his monetary policy stance in a post on Truth Social Tuesday evening.
“Could somebody please inform Jerome “Too Late” Powell that he is hurting the Housing Industry, very badly? People can’t get a Mortgage because of him. There is no Inflation, and every sign is pointing to a major Rate Cut. “Too Late” is a disaster!” Trump wrote on his social media platform.
El-Erian said he believed the central bank should issue a 25 basis point rate cut in September, largely to boost economic growth and support the labor market.
Investors are eagerly anticipating a rate cut next month. Markets are pricing in an 82.9% chance the central bank will trim rates a quarter-point, according to the CME FedWatch tool.
In the interim, markets are waiting on the Fed’s latest meeting minutes, which will offer investors a peep into how the central bank viewed inflation and the outlook for rate cuts in July. Later this week, traders will be focused on Powell’s speech at the Fed’s annual Jackson Hole symposium, which could offer more insight the path of monetary policy.