NEW YORK Mohamed El-Erian, the chief economic adviser at Allianz SE, said Thursday that the Federal Reserve’s decision to hold off on a rate hike reflects policymakers’ reluctance to add to international financial fragility.
The Fed kept interest rates unchanged in a bow to worries about the global economy, financial market volatility and sluggish inflation at home, but it left open the possibility of a modest policy tightening later this year.
“The Fed’s decision to hold off on a rate hike reflects the extent to which it is worried about further destabilization in global financial condition spilling back and undermining the U.S. recovery,” El-Erian told Reuters. “They are reluctant to add to international financial fragility – and they wish to limit adverse spillback to the U.S. economy.”
El-Erian said he thinks the Federal Reserve will hike at some point this year “in the context of a concerted effort to shift market expectations to focus on what will be the loosest tightening in Fed history.”
El-Erian added the U.S. central bank is operating without the support of other policymakers. “And its models haven’t done a great job of predicting economic developments, and understandably so given all the structural changes here and abroad,” he said.
Fed Chair Janet Yellen said developments in a tightly linked global economy had in effect forced the U.S. central bank’s hand.
“The outlook abroad appears to have become less certain,” Yellen told a news conference after the Fed’s policy-setting committee released a statement following a two-day meeting.
(Reporting By Jennifer Ablan- Editing by Cynthia Osterman)
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