Mohamed A . El-Erian PARTING SHOT
The Fed ’ s Credibility Problem
The global economy ’ s most important institution has lost its way and must urgently address two structural deficiencies .
EACTING TO SILICON VALLEY BANK ’ S SUDDEN COLLAPSE ,
André Esteves , a senior Brazilian banking executive , recently told Bloomberg that “ SVB ’ s interest rate risk would ’ ve been obvious to any banking intern in Latin America .” To some , this remark will sound rather rich coming from a region that has had no shortage of banking-sector problems . Nonetheless , Esteves ’ s sentiment is revealing , because it reflects mounting concerns around the world about the U . S . Federal Reserve ’ s policy making and its adverse spillover effects on other countries .
There are good reasons to be concerned . Just in the last three years , the Fed has mishandled its interest-rate hiking cycle , faced insider-trading allegations , stumbled in its supervision of banks , and , through inconsistent communication , fueled rather than calmed market volatility on several occasions .
These failings are becoming increasingly consequential for the public . Inflation has remained too high for too long , robbing people of purchasing power and hitting the poor particularly hard . Last month ’ s bank collapses were deemed serious enough for the authorities to “ break the glass ” by triggering the “ systemic risk exception ”; but this response could now impose a larger burden on all depositors . These developments , including the threat of less credit availability , have increased the risk of the U . S . falling into recession , fueling income insecurity in what would otherwise be considered a strong economy .
The Fed ’ s problems should worry everyone . A loss of credibility directly affects its ability to maintain financial stability and guide markets in a man-
The divergence between the Fed ’ s stated 2023 interest-rate trajectory and market expectations has been as wide as a full percentage point recently .
ner consistent with its dual mandate of maintaining price stability and supporting maximum employment . I personally cannot recall a time when so many former Fed officials have been so critical of the institution ’ s economic projections , which in turn inform the design and implementation of its monetary policy .
International complaints about the Fed ’ s failings ( and their adverse global spillovers ) have been cropping up everywhere . Last October , Edward Luce of the Financial Times captured the mood well in a commentary with the headline , “ The world is starting to hate the Fed .” And more recently , during their press conference , the Swiss officials dealing with the forced emergency sale of their country ’ s second-largest bank pointed to SVB ’ s failure as contributing to their problems .
Nor can I remember a time when markets have been so dismissive of the Fed ’ s forward guidance . The divergence between the Fed ’ s stated 2023 interestrate trajectory and market expectations has been as wide as a full percentage point recently . That is a remarkably large gap for the central bank at the center of the global financial system . Markets continue to go against everything they have heard and read from the Fed by pricing in a rate cut as early as June . continued on page 55
60 | FINANCIAL ADVISOR MAGAZINE | MAY 2023 WWW . FA-MAG . COM