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El-Erian: Central Banks Are Caught in a Lose, Lose, Lose

Submitted by Taps Coogan on the 3rd of June 2020 to The Sounding Line.

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Mohamed El-Erian, Allianz chief economic advisor, recently spoke with CNBC about the “lose, lose, lose” situation that has arisen as a result of the Fed “continuously conditioning markets to expect them to step in and repress any volatility.” With major indices creeping back towards the highs despite an inchoate economic recovery and massive social instability, central banks must either give in to market demands for yet more accommodation, further disconnecting them from reality, or do nothing, or even tighten, and disappoint markets and sabotage the only bright spot in the recovery.

Some excerpts from Mohamed El-Erian:

“Why has the Federal Reserve continuously conditioned markets to expect them to step in and continuously repress volatility and isn’t it time to stop doing that, because you end up not only undermining the system itself, you undermine the credibility of an institution that is critical to the well-being of this and future generations.”

“We are now increasingly in a lose-lose-lose situation for central banks. You lose if you try to undo what you’ve been doing… You lose if you try to do more, and that’s what markets are pushing. Markets are pushing for negative interest rates. Markets are pushing for yield-curve control. Markets are pushing for even stronger forward guidance. Why? The markets are functioning fine. Valuations are very high. Access to capital markets is not an issue for companies… You also lose if you don’t do anything because you have this massive disconnect..”

“We have done a great job restoring market access. We have done a great job opening the markets for bond issuance, but companies are laying off people… the Main Street program hasn’t gotten off the ground yet… Realize that the support of markets and companies, as important as that is, is necessary but not sufficient. You need one more thing which is access to people. Otherwise, the social elements will start impinging on the economic elements.”

There is more to the interview, so enjoy it above.

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