Mohamed El-Erian: I'm disappointed by what Fed Chair Powell did not cover in Jackson Hole

Key Concepts:

• Federal Reserve (Fed) policy pivot
• Inflation targets (2% vs. 3%)
• Jackson Hole Economic Symposium
• Fiscal dominance
• Long end of the yield curve
• Sovereign wealth fund
• Government stakes in private companies
• Ownership vs. control

1. Fed Policy Pivot and Jackson Hole Disappointment:

• Mohamed El-Erian acknowledges Fed Chair Jay Powell's recognition of increased risks to employment, which he views as timely, albeit a bit late.
• He notes the market's reaction, pricing in an 85% chance of a September rate cut, with the remaining 15% split between no cut and a 50 basis point cut.
• El-Erian criticizes Powell for a lack of clarity on post-September policy and for not addressing the policy implications of structural changes in the labor force, trading system, and domestic economy.
• He argues that Jackson Hole was the ideal venue for Powell to discuss lessons learned and strategic issues, especially considering it was his last Jackson Hole symposium.
• Powell's data-dependent approach is contrasted with a strategic one, which El-Erian believes is lacking.

2. Inflation Target Debate:

• El-Erian points out that the Fed has de facto been operating with an inflation target above 2% for the past four years and is projected to continue doing so for another two years.
• He suggests that behind closed doors, discussions are taking place about whether a 2.5% to 3% inflation target might be more appropriate than 2%, given structural economic changes.
• By prioritizing employment risks even with rising inflation, Powell has implicitly acknowledged that the 2% inflation target may not be as applicable as it once was.

3. Long End of the Yield Curve and Fiscal Dominance:

• El-Erian highlights the muted reaction of the long end of the yield curve (30-year Treasury) to Powell's comments, noting that it essentially returned to pre-Friday levels.
• He attributes this to the market's recognition of "fiscal dominance," characterized by high deficits and high debt levels, which are impacting monetary policy.
• He notes that long end rates are not just a US phenomenon, but are also at high levels in Japan and the UK.

4. International Influence on US Rates:

• El-Erian explains that the US long end rates are more likely to influence global rates than vice versa.
• He states that the beta (sensitivity) of other countries' 30-year rates to US 30-year rates is near one, while the beta of US rates to other countries' rates is below 0.5.
• The UK has a beta above one, meaning it is more sensitive to US rate changes.

5. Government Stakes in Private Companies:

• El-Erian expresses concern about the potential for the US government to take stakes in private companies beyond the Intel transaction.
• He emphasizes the importance of distinguishing between ownership and control, stating that ownership is acceptable, but government influence over business decisions is problematic.
• He warns that government intervention in business decisions could undermine the dynamic, entrepreneurial nature of the US private sector.
• He acknowledges that non-voting stakes are less problematic, but still cautions against any attempts to influence business decisions.

6. Ownership vs. Control:

• El-Erian reiterates the critical distinction between ownership and control.
• He states that sovereign wealth funds taking stakes in US corporations is acceptable, but any attempt to control or influence business decisions is a "very slippery slope."

7. Conclusion:

• The interview highlights concerns about the Fed's strategic direction, the ongoing debate about inflation targets, and the potential risks of government intervention in the private sector. El-Erian emphasizes the need for clarity and a strategic approach from the Fed, as well as caution regarding government influence over business decisions. The concept of fiscal dominance and its impact on monetary policy is also a key takeaway.