Market remains calm despite challenges to Fed independence – Mohamed El-Erian

[Wall Street New York City]
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The market’s reaction to recent economic developments has been surprisingly muted, according to Mohamed El-Erian, Allianz chief economic advisor and former PIMCO CEO.

Despite concerns about Federal Reserve independence and global tariffs, investors continue to show resilience in the face of potential economic headwinds.

“What’s really amazing is how muted the market reaction is,” El-Erian said in an interview with CNBC. “Every aspect of this, the what, the why, and the so what is fascinating.”

He predicted that the most likely outcome would be a steepening of the yield curve, potentially reaching 140-145 basis points from the current spread.

El-Erian suggested that markets have essentially decoupled sovereign concerns from corporate performance. “The market has gotten comfortable with the notion that the sovereign may be messy, but the corporates are fine. And that’s why Nvidia (NVDA [https://seekingalpha.com/symbol/NVDA]) gets a lot more attention than the Fed,” he explained.

This focus on corporate productivity enhancements has created a market mindset that would require “a big shock to stop this decoupling.”

The implementation of tariffs, including recent 50% tariffs on India, hasn’t triggered significant market reactions. El-Erian attributes this partly to behavioral conditioning, noting that “we have been behaviorally conditioned to buy the dip.”

He pointed out that recovery speeds have been remarkable, with markets returning to record highs just 38 sessions after significant downturns.

While El-Erian believes the economy is slowing, he doesn’t see dramatic deterioration. He identified two major risks: the bond market shifting from relative to absolute space, and tariffs becoming a much bigger problem for global growth.

“I do think that the Fed will cut. I do think we’re going to have inflation persistently above 2%, and that the equilibrium rate of inflation for the US is above 2%,” he said.

Although El-Erian doesn’t expect the Federal Reserve to change its 2% inflation target, he noted that we’ve already “lived four years with above 2%” inflation without dramatic consequences.

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