- The Federal Reserve should already be tapering asset purchases amid inflationary signals, Mohamed El-Erian said Monday.
- “The Fed is late,” he told CNBC. “They are going to be very dovish for very long. They’ve already proven it.”
- The famed economist also said he prefers to be in the technology sector given the rising-price environment.
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The Federal Reserve should already be tapering assets purchases amid inflationary signals, Mohamed El-Erian said on Monday ahead of the figures for July CPI due this week. The famed economist also said he prefers to own tech stocks in such a rising-price environment.
“The Fed is late. It should have started tapering already,” El-Erian told CNBC on Monday. “I think the market continues to believe that the Fed will hold out from tapering as long as possible and, therefore, will not raise rates for a while. They are going to be very dovish for very long. They’ve already proven it.”
Given this inflationary setup, the chief economic adviser at Allianz laid out two reasons why he favors tech stocks.
First, he noted that tech companies have proven especially adept at navigating changes in a COVID-impacted environment. Some such examples are Facebook, Apple, and Microsoft, which saw explosive growth during the height of the pandemic.
Secondly, he said these very same firms are less impacted by inflation, and can keep revenues afloat better than any other industry.
“So, they have a revenue advantage and they have a cost advantage, and therefore they have a very strong earnings advantage,” he said.
El-Erian also touched on July’s stellar jobs report, which saw the US economy adding 943,000 payrolls in that month.
“The wage numbers on Friday’s report were really good for the US economy” but were “less good for input costs,” El-Erian told CNBC. “If the inflation proves to be tamed, then you’ve got the Goldilocks.”
A Goldilocks economy, he explained, comes from the combination of both approaches.
“Top-down has been continued ample, predictable liquidity,” he told CNBC. “Bottom-up has been strong earnings, and that has powered the markets through all sorts of things.”
El-Erian did say inflation will eventually “exhaust itself” though on a “much longer timeframe than what the Fed expects right now.”
He’s repeatedly pointed to people’s lack of understanding of how it is already spreading throughout the economy and has countered the Fed’s longstanding narrative that inflationary pressures are temporary.
The central bank slashed rates to historic lows at the start of the pandemic to stimulate economic activity and has signaled its intention of keeping interest rates unchanged until 2023.