El-Erian predicts Fed rates could hit 3% by 2026

Mohamed El-Erian, Chief Economic Advisor at Allianz, has shared insights regarding the Federal Reserve's interest rate expectations ahead of the upcoming FOMC meeting. He indicated that the Fed rates could decrease to nearly 4% by the end of 2023 and potentially bottom out at 3% by July 2026. This projection comes as the Federal Reserve has maintained rates in the 5.25%-5.50% range since July 2023, with policymakers hinting at possible cuts due to signs of an economic slowdown and inflation nearing the 2% target. El-Erian's analysis included a comparison of officials' expectations with market forecasts, highlighting the anticipated number of rate hikes and cuts. The FOMC's projections for 2024 suggest real GDP growth of 2.10%, core PCE inflation at 2.80%, and an unemployment rate of 4%. These figures reflect a cautious optimism about the economy's trajectory, despite mixed signals from inflation data. The August Consumer Price Index report showed a 2.5% annual increase, which tempered expectations for aggressive monetary easing. While core inflation rose by 0.3% month-over-month, indicating persistent inflation in service sectors, some economists believe the Fed is positioned to begin cutting rates. Chris Zaccarelli noted that the Fed could cut rates by 25 basis points in the upcoming meeting. Market sentiment appears stable, with U.S. corporate bond spreads not widening significantly, suggesting that investors are not overly concerned about a recession. This context is crucial as the Federal Reserve navigates its monetary policy in response to evolving economic conditions.