- Mohamed El-Erian said markets are embracing a “soft landing scenario” as the US two-year bond yields fell.
- The yield drop followed the Federal Reserve’s latest communique on inflation and interest rates on Wednesday.
- Investors are optimistic the Fed will soften its rate policy, raising the odds of a mild economic downturn.
Top economist Mohamed El-Erian says markets are embracing a “soft-landing scenario” for the US economy, as reflected in the latest declines in short-term bond yields.
“A @markets chart illustrating the stunning 2-day move in the yield on the US 2-year as #markets embrace more the soft-landing scenario,” El-Erian tweeted on Thursday, above a chart showing a drop in the bond rate after Federal Reserve chairman Jerome Powell offered encouraging comments on inflation.
Two-year yields are highly sensitive to market expectations for the Federal Reserve’s interest-rate policy, and the latest drop suggests investors are scaling back bets for further monetary tightening as inflation in the US cools.
The central bank has boosted benchmark rates by 450 basis points since last March to rein in price pressures.
The prospect of the Fed softening its policy would be good news for the economy – that would raise the odds of a milder downturn this year than many experts have warned.
The stock market also reflects the optimistic sentiment, with the S&P 500 extending its 2023 gains to almost 9%.
The Fed has already scaled back the size of its rate hikes, with the latest one delivering a 25 basis point increase – the smallest since last March. Consumer price pressures have been steadily easing since mid-2022, with the December inflation reading coming in at 6.5%, the lowest in over a year.
A less aggressive Fed would reduce the potential severity of a widely anticipated US economic slump. Such a “soft-landing scenario” would be less damaging for corporate earnings and valuations.
El-Erian has largely been pessimistic about the Fed’s handling of the US economy and inflation in recent years. Previously, he has said the odds of a soft landing is possible but “meager.”