Mohamed El-Erian's three 'red lights' surrounding Fed policy

Allianz Chief Economic Advisor Mohamed El-Erian believes the Federal Reserve has waited far too long to cut interest rates, and cutting rates before its September policy meeting would do more than spook the markets.

"It could contribute to a recession because people could get more worried and spend less. And that's what we need to avoid. This self-reinforcing negative spiral," the University of Cambridge, Queens’ College president and former PIMCO CEO tells Yahoo Finance.

He views an intermeeting rate cut as signaling "total panic" to the marketplace: "It's not going to happen, but that's what some people want to see. Why is this of concern? Because the economy has been slowing faster than the Fed and others have been anticipating."

Catch Yahoo Finance's full interview with Mohamed El-Erian.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Luke Carberry Mogan.

Video Transcript

The global market sell up, reflecting a wide array of worries facing investors.

One top concern being the health of the US economy and the Federal Reserve potentially being behind in cutting interest rates to check that pulse on market sentiment.

We have former Pimco Ceo Cambridge Queens college president and Allian Chief economic Advisor Mohammed El Arian joining us now to discuss Mohammed, as I said to you in an email earlier, there's almost no one I would rather speak to today to get perspective on what's happening.

So I'm really um happy you could make the time to speak with us.

Um I wanna start with something that you have said to us frequently over at least the past six months, if not longer, which is that the longer the fed waited to cut rates, the higher the chance of something breaking.

Is that what we're seeing happen right now?

Thanks for having me, Julie.

We're seeing red lights on three things, fundamentals, policy and technicals and they are feeding on to each other.

And the question is, will they simply run themselves out or will they result in something even worse?

So, on the policy side, you know, I've been of the view that the fed had waited too long.

They should have cut, they didn't.

And now they're perceived to play catch up.

And it's incredible to hear people calling from an inter meeting cut.

That is quite amazing that that's what some people want to see.

It's not gonna happen, but that's what some people want to see.

Why is this of concern because the economy has been slowing faster than the Fed and others have been anticipating.

Thus, the red light on fundamentals and then you get the technicals, the unwinding of levied position, including out of Japan.

So what we're living through right now are these three blinking red lights and we need them to turn yellow and then green Mohammed.

I'm curious because I was talking to uh Joe Brusuelas economist over at RSM.

He was making the case uh Mohammed to me that listen, if what we're seeing continues like this and we got, you know, another flat reading in the CP I or P CE, then he did think an intermediate cut.

Um and a super size one, by the way, 50 would be on the table.

You seem skeptical Mohammed, why are you skeptical?

Because I think that would signal panic, it would signal total panic.

You normally get those sorts of cuts when there's a major exogenous negative shock.

When for example, you have the pandemic, when you have Lehman failing.

When you have something that is comes from nowhere.

What we're seeing here is simply an economic slowdown and the fed that's behind for it then to do an emergency cut would give the completely wrong signal to the marketplace.

And in fact, it could contribute to a recession because people could get more worried and spend less.

And that's what we need to avoid this self reinforcing negative spiral.