Yahoo Finance, Released on 8/2/23

Ratings agency Fitch surprised a lot of people when it downgraded its rating on U.S. debt from AAA to AA+. Allianz Chief Economic Advisor Mohamed El-Erian tells Yahoo Finance Live that he was surprised by the move too, and that “what Fitch put in their statement has been true for a while, so why now?” “When you look at the reason you scratch your head as to the timing of this,” El-Erian said. On the political issues the downgrade could raise, El-Erian says “domestically, this is likely to fuel more of the polarized conversations that are going on. Internationally, for the adversaries of the U.S., they will point to that as yet another development in terms of the U.S. no longer being as powerful and as influential,” adding that he thinks those arguments are “weak, but they will be used.” Overall, El-Erian says there is “no reason for the U.S. to fall into recession,” saying the economy is “vibrant enough, it is flexible enough, and it’s handling this global soft patch well.” His biggest worry is that the Fed will overtighten and “continue pursuing an inflation target, 2%, that makes less sense for today’s structural and supply-side elements.” El-Erian says he wouldn’t have hiked rates in July and “certainly wouldn’t hike in September.” “There’s a more fundamental issue, which is, as I regard, excessive data dependency by the Fed,” El-Erian said, highlighting how data is backward looking while the Fed’s tool, interest rates, can take time to have an impact.

Mohamed El-Erian is the President of Queens College, Cambridge and the Chief Economic Adviser of Allianz, a multinational financial services company. He is the former CEO and co-Chief Investment Officer of PIMCO, a global investment firm and one of the world’s largest bond funds in the world. Dr. El-Erian also served as a member of the faculty of Harvard Business School. Before joining PIMCO, Dr. El-Erian was a managing director at Salomon Smith Barney/Citigroup in London and before that, he spent 15 years at the International Monetary Fund in Washington, D.C. His latest book is Permacrisis: A Plan to Fix a Fractured World.

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