The U.S. Debt Crisis: Why Growth Is the Only Solution | Mohamed El-Erian Pt. 2 LIVE @ DAS
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Good morning. My name is Felix. I'm the host of the Forward Guidance podcast on BlockWorks, and it's an absolute honor to be joined this morning by Mohammed El Erian. It's great to have you at the Digital Asset Summit.
Thanks for having me, and it's wonderful to
be here. Yeah. Super excited for this. So we're talking here on the morning. It's Fed day, so let's talk and get right into it. What's your expectation for the Fed today? What are you going in there? Obviously, everybody's expecting a pause, but what is your high level outlook for what you're looking from there? It's also a dot plot day, so we'll have the summary of economic projections. So what are you looking for there?
So, normally, you look at three things. What are they gonna do with interest rates? What are they gonna do with communications? And what are they gonna do with the dot plot? Simplest thing on interest rates, nothing. Communication, they're gonna try to pivot from we will be cutting rates because of good news, because of inflation coming down, to we may be cutting rates because of bad news, because growth prospects have changed. And they're gonna have to somehow do this while not worrying people because inflation expectations have gone up. So that's a really tricky communication that chair Powe
be an interesting one. And my understanding is the discussion around pausing, quantitative tightening has to do with the debt ceiling dynamics that are occurring right now. We've already cut QT in half. We're at 45,000,000,000 a month now. What do you think is the market impact of something like pausing quantitative tightening? Because obviously, the the direct impact is on bank reserves, but a lot of folks look at what's happening on the bank balance sheet, Fed balance sheet, in terms of how that starts reflected in liquidity and therefore risk assets. So do you see that as a market moving dy
So it's helpful that the margin for, yields, keeps them lower than they would have been otherwise, helpful at the margin for risk assets. But is it really substantive? No. It's just helpful at the margin.
Yeah. Yeah. Makes sense. And something you mentioned there, it's, you know, it's the issue with soft data, the the survey data. So inflation expectations have been skyrocketing recently. But when you look a little bit deeper into it, it's actually this this significant dispersion is occurring where, Democrat leaning survey participants are very concerned about inflation expectations. Republicans are almost worried about deflation at this point, and independents are somewhere in the middle. So how do you think the Fed is trying to gauge through this soft data that seems to be quite noisy?
So there's two ways of dismissing the soft data that has been uncomfortable. One is saying it's all about politics, and we shouldn't pay attention. The other one is saying that it hasn't been translated as yet into the hard data, so we shouldn't worry about it. Both, I think, are misleading. I think we have to take the soft data seriously. There's other surveys that shows you that both households and companies now have a higher inflation expectation than it did before. So it's not just politics. There's something going on, that leads people to think that prices are gonna go up higher. And it's
Are you a believer in let's talk a bit about inflation here. So are you a believer that part of inflation is a psychological phenomenon? Because if so, it would make sense that, you know, you could dismiss this surge in inflation expectations as just political. But if people change their purchasing habits, their co
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