Inflation is easing but Fed won’t in any ‘significant manner’

U.S. Fed is unlikely to slam the breaks on raising rates even though inflation seems to be easing, says Mohamed El-Erian. He’s the Chief Economic Advisor at Allianz.

El-Erian’s remarks on CNBC’s ‘Squawk Box’

In September, he’s convinced, the central bank will still choose to raise rates by more than 50 basis points. This morning on CNBC’s “Squawk Box”, El-Erian said:

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The Fed will have to consolidate its gains. They can’t celebrate and is not going to slow down in any significant manner. [They’ll do] somewhere between 50 and 75 basis points, but that’s a lot considering we’ve already had two 75s.

His outlook is in line with a few of the Fed representatives that have already said the data is moving in the right direction but it’s still too early to cease rate hikes.

More importantly, the job market is keeping resilient in the face of higher rates, which suggests the underlying economy is strong enough to withstand the tightening monetary policy.

Will the stock market give back its recent gains?

It’s not that the risk of a recession has completely waned or the path is entirely clear for the equity market, but a case, El-Erian said, can be made that the recent rally in the S&P 500 may sustain.

The first stage of the rally was all driven by technicals and relative valuations. What’s encouraging is that the latest stage of the rally was driven by less worrisome fundamentals. That’s a good thing; that has more legs to it.

The benchmark index has now retraced half of its year-to-date loss, which BTIG says signals that the trend is changing in favour of the bulls.  

Also on Thursday, wholesale inflation came in 0.5% down month-over-month, further strengthening the thesis that price increases are losing pace.