That selloff in stocks showed the market had priced in a rate hike of just 25 basis points at the Fed's next meeting in March, according to El-Erian.
It suggests the US central bank failed to communicate the possibility of a bigger increase, and that undermines its credibility and raises the risk of a crash, the economist added. "Something is not right in all this," he said."The whole point of the increased transparency adopted by the Fed in the last couple of decades is to allow for smooth economic and financial adjustments to policy regimes." "There is something more sinister in play. The more this undue volatility occurs, the greater the risk of economic and market accidents."
The central bank eased up on monetary tightening in February, bringing in a 25 basis point increase after four consecutive 75-basis-point hikes in 2022. But Powell's comments suggest a 50-point rise is back on the table for next month. "Rather than overwhelmingly pricing in an increase of 25 basis points as previously signaled by the Fed, the markets moved the odds in favor of 50 points, which would reverse the downward shift in hikes the central bank prematurely made just a month ago," El-Erian said.
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