Former PIMCO chief Mohamed El-Erian, who now heads Queen's College, University of Cambridge, doesn't understand the logic of calls for an immediate rate cut after the stock market plunged earlier in the week, Fortune reports.
"I am very strongly against the idea of cutting between meetings. That would be a big mistake. It seems that we wanted to go to the emergency department because of the cough," he said in an interview with the magazine.
Mohamed El-Erian says that the decline seen in the stock markets at the beginning of the week is not a sufficient reason for an interventional interest rate cut. In his opinion, such an action would bring more harm than good.
In particular, it would undermine expectations and could lead to caution among companies, consumers and lenders. It would also scare business leaders, Wall Street and analysts.
He believes there would be speculation in the market that the reason for the rate cut is not just a "slightly weaker" July labor market report, but something much more serious.
"The Fed wouldn't be able to convince people that there's nothing they don't know," said a financial market expert.
The second reason to oppose interventional interest rate cuts, according to the former PIMCO chief, is the need to avoid a situation where the Fed becomes hostage to the market, a situation where investors always expect the central bank to act in the event of a major price drop.
Mohamed El-Erian estimates that the risk of a US recession in the next 12 months is 35 percent. He points out that while this is more than the "standard" 15 percent, it's still not an "extreme" value.
