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Wall Street Veteran El-Erian Says Fed Comments Roil Markets
"Mohamed El-Erian sees the rollercoaster ride in financial markets, with Friday’s surprisingly strong US jobs report producing the latest drop, as another lesson for Chairman Jerome Powell and his Federal Reserve colleagues.
“Once again, Fed communication has contributed to undue volatility in markets,” the Gramercy Funds chairman and Bloomberg Opinion columnist said on Bloomberg Television’s The Open. “While Chair Powell went out of his way to be balanced” in remarks earlier this week, “he did not push back in any way against what already was a significant rally in markets. While he said other things, including warning about inflation, he didn’t realize where the technicals of this marketplace were. He didn’t realize the behavioral aspects. And that’s why you got this overreaction.”
Rick Rieder, chief investment officer for global fixed income at BlackRock Financial Management Inc., also said on the BTV program that markets “got a little overzealous.” He advises investors “get comfortable” in parts of the credit market with highly rated securities of relatively short maturity yielding 5% to 6%, but to “be careful as you go down the credit stack, down the capital stack into equity.”
Read more from El-Erian: Powell and the Markets Talk Past Each Other
✓ Stocks fell on Friday and two-year US Treasury yields -- which are more sensitive to imminent Fed rate moves -- rose to near 4.4% on the view that the Fed will keep tightening even if that means a recession down the road.
Swap traders increased their wagers on where the Fed rate will top out next year by more than 10 basis points to 4.97%. That’s from a current benchmark between 3.75% and 4%.
✓ El-Erian said he expects the central bank “will guide us to above 5%” on its so-called terminal rate. “This is really tricky,” he added, “the Fed has to be very careful about what it communicates” to reduce volatility as it walks the line between arresting the fastest inflation in decades and keeping the economy from contracting.
Rieder agreed that “they need to get to about 5-ish,” adding “Rate volatility is the big dynamic. If that stabilizes, I don’t think it means big rallies in rates at all. It means more stability after what has been an incredibly tumultuous year.”
Read more: BlackRock’s Rieder Sees Chance for Rate Volatility to Turn Lower
News about Markets, Fed
The bad news: 2023 is likely to be even crazier. The good news: Tough times make leaders and businesses better
"For business, 2022 has been a dizzying year, and the fourth quarter has only upped the ante on the insanity.
> In November alone, we watched Elon Musk take over Twitter and decimate the company and its workforce, one tweet at a time. A $32 billion crypto exchange, FTX, was exposed as a de facto Ponzi scheme and collapsed in 48 hours. And bloated Big Tech companies announced plans to lay off more than 50,000 employees, in total, in a quest to become more efficient.
✓ With all this chaos swirling, perhaps the only certain thing is that 2023 will be even more uncertain. With inflation still punishingly strong, and a U.S. recession looking increasingly likely, the biggest challenge business leaders face is how to steer a course between those two dangerous rocks—and come out stronger on the other side.
> CEOs can’t fight rising prices without help from policymakers. Our cover story on U.S. Federal Reserve Chairman Jerome Powell explores how he’s struggling to rein in the highest inflation since the 1980s. Powell has followed the classic economic playbook by raising interest rates. But it’s unclear if he’ll be able to land this plane without a crash—especially since years of “quantitative easing” by the Fed have encouraged too many companies and investors to take risky bets with cheap, borrowed money.
✓✓ As author Christopher Leonard notes, Powell has two choices: “He can tolerate high inflation, and risk that it gathers strength and begins to rage out of control. Or he can tighten the money supply, and risk recession and possibly a financial crisis.”
Both those options are ugly, which is why smart CEOs are focusing on how to protect their companies. Fortunately, seasoned leaders have coped with recessions and inflation before—not to mention the unprecedented dilemmas that came with COVID. Shawn Tully spoke with and studied the work of five battle-tested Fortune 500 CEOs, compiling their top five strategies for steering their businesses in volatile times, including raising prices, taking care of your best people—and seizing opportunities that arise when your competitors stumble.
(Check back for his story, which is publishing online later this week.)
One inspiring thing to remember is that the strongest businesses are forged in tough times, when leaders are forced to get lean, focus, and execute. When COVID first hit, Airbnb CEO Brian Chesky was put to the test earlier than most. In 2020, his business nose-dived 80%; to save it, he had to lay off 25% of his workforce and get back to his company’s core business of peer-to-peer rentals.
“We were focusing on flights and all these different businesses … we had to get back to our roots,” Chesky told Fortune’s Trey Williams recently. The strategy paid off in a big way, he said: “We did more than $3 billion in free cash flow in the last year, so that means we do roughly half a million dollars per employee.”
The takeaway: Leaders who act decisively in stormy times can reap big rewards when the waters finally get calmer.
Alyson Shontell
Editor-in-Chief, Fortune
@ajs
This article appears in the December 2022/January 2023 issue of Fortune with the headline, “Tough times make leaders better.”
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