Mohamed El-Erian Will Miss Janet Yellen When She’s Gone

The Bill Gross bête-noir thought J-Yells showed just the kind of balance and measure that Donald Trump’s not looking for in a Fed chair.
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Courtesy Federal Reserve.

Courtesy Federal Reserve.

You know it, we know it and he knows it: This year’s Jackson Hole gathering of central-banking types was a bore. A snooze. A yawn. Sure, Janet Yellen probably sounded too pro-regulation to stave off the inevitable Gary Cohn Fed chairmanship—pending, of course, another pro-anti-Semite outburst on the part of his chief, although that might not even be a dealbreaker—but she wasn’t giving one drop of useful information to anyone other than tea-leaf-reading bond traders. This was a good thing, because whatever they do, the eventual collapse won’t be there fault, according to Allianz’s Mohamed El-Erian.

Chair Yellen and President Draghi had good reasons to disappoint the many eager for policy insights. The Fed is well embarked on a “beautiful normalisation” (borrowing a concept used a few years ago in a different context by Ray Dalio, the founder of hedge fund Bridgewater). Without derailing growth or destabilising markets, it halted QE, raised rates three times, and signalled its intention to contract its balance sheet…. When it comes to global feedback loops, neither they nor Governor Kuroda are in a position as yet to opine with sufficient authority on the prospects for simultaneous normalisation, especially given uncertainties about productivity, wage formation and the political enabling environment for the much-needed policy transition away from excessive reliance on central banks….

Last week’s symposium left lots of open questions for markets that, given very profitable adaptive expectations, are now deeply conditioned to rely on central banks to boost asset prices, repress financial volatility, and influence asset class correlations in a manner that rewards investors and traders even more…. Over the longer-term, however, it heightens the risk of possible collateral damage to the economy from artificially elevated asset prices, particularly if political conditions continue to delay much-needed pro-growth measures.

Yellen and Draghi had good reason for Jackson Hole reticence [FT]
Trump Gets Yellow Light From Yellen on Bank Deregulation [WSJ]
Treasurys Strengthen as Fed’s Yellen Addresses Regulations, Not Interest Rates [WSJ]

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