Mohamed El-Erian said the slowdown in the Federal Reserve’s most closely watched inflation gauge highlights a slowing economy that raises the risk of a monetary policy mistake by the U.S. Federal Reserve.
“The economy is slowing faster than most economists expected, and faster than the Fed expected,” El-Erian, president of Queens’ College in Cambridge and a Bloomberg columnist, told Bloomberg TV on Friday.
The personal consumption expenditures (PCE) price index rose 2.6% year-over-year in May, in line with expectations and the slowest pace so far this year. The Fed has been targeting an average of 2% inflation as measured by the PCE price index over the past two years.
“The economy is slowing, and it has a few engines right now. The Fed would certainly be talking about a July rate cut if it were a forward-looking decision,” El-Erian said.
Instead, the Fed “remains overly data-driven, and it takes a lot of historical data to get it to change.”
Fed officials this month updated their forecast for an average of a quarter-point rate cut this year, compared with three cuts expected in March. Interest rates markets continue to price in at least a quarter-point cut this year, as early as September. There is little chance of a cut in July.
El-Erian said the Fed risks keeping rates “too high for too long.” He sees a 35% chance of a U.S. recession, compared with 50% for a soft landing.
“The most likely mistake right now is that the Fed starts cutting rates too early,” he said. “Eventually, it will end up cutting them too much.”
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