Rate cut expectations are too aggressive! Allianz's El-Erian: A 75 basis point rate cut before the end of the year is more realistic

Renowned Wall Street economist and Chief Economic Advisor at Allianz, Mohamed El-Erian, warned that the market's expectations for a significant rate cut by the Federal Reserve before the end of the year are overly optimistic.

El-Erian stated, "The market has already priced in expectations of multiple rate cuts in advance, which in my view is problematic. The market's expectations for rate cuts have gone too far."

Recently, traders have increased their bets on rate cuts, believing that the Fed could cut rates by as much as 100 basis points before the end of the year. However, El-Erian believes that a more realistic scenario is that the Fed will cut rates by 75 basis points before the end of this year.

He believes that achieving an economic soft landing does not necessarily require such aggressive rate cuts, as the market will self-adjust.

"There is a view that in order to achieve an economic soft landing, more aggressive policy measures need to be taken, and this idea must be adjusted in some way," El-Erian said. "The market will always adjust its expectations at some point."

Rate Cut Expectations Maxed Out? Market Awaits Powell's Speech

With comments from several Fed officials and the latest release of employment data, the market seems to believe that a significant rate cut by the Fed in September and before the end of the year is a done deal.

The US non-farm payroll data released on Wednesday was revised down by a significant 818,000, indicating a weak labor market and giving the green light for rate cuts. The minutes of the Fed's July meeting also showed that "the vast majority" of FOMC members agreed on a rate cut in September.

The futures market indicates that traders have increased their bets on rate cuts, believing that there could be a 100 basis point cut before the end of the year, with a possible 25 to 50 basis point cut in September.

The annual Jackson Hole Global Central Bankers Conference is currently underway. The market is closely watching Fed Chair Powell's keynote speech at the conference today in hopes of gaining more insights into the rate cut.

However, Wall Street generally believes that Powell may not reveal too many details about the rate cut. With Powell's usual cautious approach, he is likely to remain tight-lipped about the timing of the rate cut and will not disclose how much the rates might decrease