Ahead Of Fed Rate Decision, El-Erian Warns Central Bank May Not 'Validate' More Cuts

• El-Erian added that he expects the central bank to also acknowledge that the impact of President Donald Trump’s tariffs on inflation has been lower than expected.
• Analysts at Schwab echoed similar concerns, stating that an interest rate cut in December is “far from certain,” while maintaining a cautious stance on inflation.
• However, Jefferies’ Chief Market Strategist, David Zervos, cautioned that the Fed will have to consider the possibility of far fewer jobs being created.

Mohamed El-Erian, Chief Economic Advisor at Allianz, said on Wednesday that after the highly anticipated Fed rate decision later during the day, the central bank is unlikely to “validate” additional rate cuts.

“The world’s most powerful central bank is unlikely, however, to explicitly validate the additional cuts that markets have priced in or fully embrace the significant productivity upside from AI and other innovations,” El-Erian said in a post on X.

El-Erian added that he expects the central bank to also acknowledge that the impact of President Donald Trump’s tariffs on inflation has been lower than expected. This comes after the Consumer Price Index (CPI) report for September showed the inflation was at 3%, lower than Wall Street’s consensus of 3.1%.

Rate Cut Expectations

El-Erian’s comments come hours before the Federal Open Market Committee (FOMC) is scheduled to announce its interest rate decision. According to data from the CME FedWatch tool, there is a 97.8% probability of a 25 basis point rate cut.

On Tuesday, analysts at Schwab echoed similar concerns, stating that an interest rate cut in December is “far from certain,” while maintaining a cautious stance on inflation.

“For Fed policy makers, the ultimate nightmare would likely be having to re-adjust rates back up to fight inflation triggered in part by cutting too dramatically. This happened in the 1980s and has become a third rail for the central bank. Institutional memories are long,” the firm said in a recent note.

Fed’s Increasing Problems

There are growing concerns about the weakness in the labor market. Jefferies’ Chief Market Strategist, David Zervos, cautioned that the Fed will have to consider the possibility of far fewer jobs being created despite the U.S. economy growing at a healthy rate.

He stated that nearly 1.5 million jobs had been revised downwards over the last 18 months. However, Zervos noted that there are many excellent policies outside monetary policy that are providing tailwinds to the U.S. economy. On the inflation front, Zervos contrasted concerns of a price rise, stating that there is no problem of anchoring inflation expectations.

Meanwhile, U.S. equities rose in Wednesday’s opening trade. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was up 0.2%, the Invesco QQQ Trust ETF (QQQ) gained 0.45%, while the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.47%. Retail sentiment around the S&P 500 ETF on Stocktwits was in the ‘neutral’ territory.

The iShares 7-10 Year Treasury Bond ETF (IEF) was down 0.12% at the time of writing.

Also See: Trump Says South Korea Deal ‘Pretty Much’ Confirmed

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