EDITOR'S NOTE: A few weeks ago, we say the markets respond to the Federal Reserve’s 75-bp interest rate hike. In short, it was a confusing mess. Markets rallied and then tanked. In fact, that “whipsaw” response has become a common theme in today’s marketplace, and it can happen in response to traditionally bullish or bearish reports alike. What’s going on? The Fed is straddling inflation and economic growth. It’s difficult to combat inflation by raising interest rates without crashing the economy. Wall Street has largely ditched the Fed’s “soft landing” aspiration as the markets have been net negative; Treasury yields skyrocketing to price in a very drastic high-interest scenario. The problem with a severe spike in rates is that companies with a huge debt burden run the risk of insolvency. And “zombie companies,” businesses on the edge of insolvency if it weren’t for a steady feed of zero-cost money, are likely to get wiped out. Overall, this doesn’t paint the brightest picture of economic health. But what’s even more concerning is that this scenario isn’t just playing out in the US. It’s a global phenomenon. And the risk of a “systemic” global slowdown and potential defaults around the world is not only conceivable but also palpable.
Mohamed El-Erian, Allianz chief economic advisor, joins ‘Closing Bell’ to discuss what he makes of the Fed decision to boost rates by 75 bps, how he interprets the recent economic data and thoughts on potential defaults around the world.
Source: Market Sanity
Mohamed El-Erian is the Chief Economic Adviser of Allianz, a multinational financial services company. He is the former CEO and co-Chief Investment Officer of PIMCO, a global investment firm and one of the world’s largest bond funds in the world. Dr. El-Erian also served as a member of the faculty of Harvard Business School. Before joining PIMCO, Dr. El-Erian was a managing director at Salomon Smith Barney/Citigroup in London and before that, he spent 15 years at the International Monetary Fund in Washington, D.C. His latest book is The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.
Originally published on Market Sanity.