The worst thing the Federal Reserve could do now is cut rates, says top economist Mohamed El-Erian. “If they do that, we could end up with stagflation and financial instability,” he said Monday. Although markets are expecting rate cuts as early as June in response to the banking crisis, El-Erian believes that would be a misstep in the ongoing battle against inflation. It’s a sentiment Cleveland Fed President Mester shares, anticipating monetary policy to move “somewhat further into restrictive territory this year, with the fed funds rate moving above 5% and the real fed funds rate staying in positive territory for some time.” Mester said she was “very comfortable” with the outcome of the quarter-percentage-point raise and anticipates no cuts this year. In other news, Social Security is expected to face insolvency by 2033 due to slower economic growth; more than 66 million Americans would see a benefit reduction of 23–25% unless major changes are made before 2034.
Business Insider/Jennifer Sor
The worst thing the Federal Reserve can do now is cut interest rates, top economist Mohamed El-Erian says
Markets have been upping bets that the Federal Reserve will cut interest rates as soon as this summer as the economy deals with stress from the banking crisis, but that’s actually the worst thing the central could do at this point, according to top economist Mohamed El-Erian.
“The worst thing they could do right now is say, we have a credit issue coming, let’s cut interest rates,” the Allianz chief economic advisor said in an interview with Bloomberg on Monday. “If they do that, we could end up with stagflation and financial instability.”
El-Erian has warned of a potential stagflationary crisis and growing financial instability for months, as prices are still well-above the Fed’s 2% inflation target, and the market has taken a dim view of the central bank’s ability to rein it in without hurting the economy. Cutting interest rates would damage that trust even further, he said, and ups the risk that inflation expectations spiral out of control.
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Fox Business/Megan Henney
Social Security cuts could be coming soon — here’s who will be affected
The Social Security program is expected to run dry within a decade as a result of slower economic growth — and today’s youngest retirees could be among the first in the nation to see benefit cuts.
New findings from the Social Security and Medicare Trustees report show the entitlement program faces insolvency as soon as 2033, a year earlier than previously projected, The acceleration toward insolvency is largely the result of a 3% downward revision of gross domestic product and labor productivity over the next decade.
Unless major changes are made before 2034 to shore up the trust fund, more than 66 million Americans would see a benefit reduction between about 23% to 25%, the report showed.
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Bloomberg via Yahoo Finance/Jonnelle Marte
Fed’s Mester Says Rates Should Rise Above 5%, Stay for Some Time
Federal Reserve Bank of Cleveland President Loretta Mester said policymakers should move their benchmark rate above 5% this year and hold it at restrictive levels for some time to quell inflation, with the exact level depending on how quickly price pressures ease.
To put inflation on a steady path down to 2%, monetary policy needs to move “somewhat further into restrictive territory this year, with the fed funds rate moving above 5% and the real fed funds rate staying in positive territory for some time,” Mester said at an event Tuesday in New York with the Money Marketeers of New York University.
Fed officials lifted interest rates by a quarter percentage point last month, bringing their policy benchmark to a target range of 4.75% to 5%, up from near zero a year earlier. Forecasts released at the same time showed the 18 officials expected rates to reach 5.1% by year-end, according to their median projection.
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