Renowned economist Mohamed El-Erian is urging the Federal Reserve to refocus its efforts on combating inflation, citing the latest jobs report as a stark reminder that price pressures are still very much alive. The surprising strength of the labor market, with nonfarm payrolls surging by 254,000 in September, has prompted a significant shift in market expectations. El-Erian, president of Queens’ College, Cambridge, warns that the Fed must resist pressure to prioritize employment over price stability, emphasizing that the central bank’s mandate extends beyond maximum employment.
The jobs report, which exceeded estimates, triggered a sharp increase in US stocks and bond yields. The unemployment rate unexpectedly dipped to 4.1%, while annual wage growth accelerated to 4%. In response, investors have drastically scaled back their bets on aggressive Fed policy easing in the coming months. Swaps traders now anticipate around 50 basis points of interest-rate cuts by year-end, down from over 60 basis points just a day prior.
El-Erian notes that the data has tempered overly optimistic expectations of rate cuts, bringing market pricing more in line with reality. Yields on the two-year Treasury have surged, rising more than 18 basis points to 3.89%. The economist cautions that the Fed must maintain its focus on the broader inflation picture, rather than being swayed by short-term labor market fluctuations.
In contrast, Austan Goolsbee, president of the Federal Reserve Bank of Chicago, argues that the jobs report supports the case for lower rates in the months ahead. While acknowledging the need for the Fed to prioritize longer-term trends in inflation and the labor market, Goolsbee emphasizes that the central bank’s focus should remain on achieving its 2% inflation target.
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