Fed to Hold Rates "Quite a While" Despite Hot Inflation, El-Erian Says

Mohamed El-Erian, President of Queens’ College, Cambridge, and Bloomberg Opinion columnist, says the Federal Reserve will likely hold interest rates steady for a significant period following the release of a hotter-than-expected inflation report.

In an interview on Bloomberg Television, El-Erian stated that the Fed, if truly committed to its 2% inflation target, should be raising rates. However, he believes the central bank will instead prioritize economic growth and US exceptionalism by tolerating higher inflation and pausing rate hikes.

"At face value, it’s not good news for the Fed," El-Erian said, referencing January’s consumer price report. "They will tolerate high inflation and they will just keep promising us that everything will be fine, and I think that we are going to be pausing, the pause button will be on a lot longer than the markets has been expecting."

This assessment comes after Treasury yields surged across all maturities following the release of the inflation data. Interest-rate swaps, as reported by Bloomberg, indicate that traders are now pricing in just one quarter-point rate cut for the remainder of 2025. The core consumer price index, which excludes food and energy costs, saw its largest increase since March.

El-Erian also criticized Fed Chair Jerome Powell and his colleagues for their reactive approach to economic data and their ambiguous forward guidance, which he argues contributes to heightened market volatility.

"This Fed has no strategic anchoring," he said. "There was no meaningful forward policy guidance coming from this Fed and that is the big mistake."

El-Erian highlighted that the recent hot inflation figures are not an anomaly, but rather align with other economic indicators. He emphasized that the report signifies a shift in consumer and corporate behavior, demonstrating a heightened sensitivity to both actual and anticipated cost increases.

"This is a different economy," he concluded.