El-Erian Warns Fed After Jobs Data: ‘Inflation Is Not Dead’

(Bloomberg) — Mohamed El-Erian says the Federal Reserve needs to renew its focus on its fight against rising prices after September’s surprisingly hot jobs report served as a reminder that “inflation is not dead.”

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His comments came after Friday’s numbers blew away estimates, triggering a jump in US stocks and bond yields. Nonfarm payrolls rose by 254,000 in September, the most in six months.

“This is not just a solid labor market, but if you take these numbers at face value, it’s a strong labor market late in the cycle,” El-Erian, the president of Queens’ College, Cambridge, told Bloomberg Television on Friday.

“For the Fed, it means push back much harder against pressure from the markets to put you in the single mandate box,” he added. “Enough talk about, ‘The Fed should only be concerned about maximum employment.’”

Investors rapidly slashed wagers on sharper Fed policy easing in November and December after the release. The data also showed the unemployment rate unexpectedly fell to 4.1%, while annual wage growth picked up to 4%.

Swaps traders are now factoring in a little over 50 basis points of interest-rate cuts from the US central bank before the end of the year, down from more than 60 on Thursday. They’ve become so skeptical of further easing that they are no longer fully pricing in a quarter-point move in November. Yields on the policy-sensitive two-year Treasury surged after the release, trading more than 18 basis points higher at 3.89%.

“For markets, this is pushing back on overly aggressive expectations of rate cuts by the Fed,” said El-Erian, who’s also a Bloomberg Opinion columnist. “This will get the market closer to what’s likely.”

Fed official Austan Goolsbee had a different take after the data. He said the jobs readout supported a case for lower rates in the months ahead while acknowledging that the central bank’s focus should remain on longer-term trends in inflation and the labor market.

“That we got a superb number, I’m extremely happy with, but let’s not lose sight of what’s the longer thread,” Goolsbee, president of the Federal Reserve Bank of Chicago, told Bloomberg Television.

“A large majority of the committee feels that conditions are going to improve on inflation, that we’re going to keep getting closer to the 2% target, that the unemployment rate is going to stabilize at full employment, and that rates are going to come down a lot over the next year, 12 to 18 months,” Goolsbee said.

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–With assistance from Jonathan Ferro, Lisa Abramowicz, Annmarie Hordern and Michael McKee.

(Updates market pricing, adds comments from Goolsbee.)

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