With the Federal Reserve’s June meeting just around the corner, analysts and investors are cautiously awaiting the decision on interest rates.
Mohamed El-Erian, the chief economic advisor at Allianz, believes the Fed will raise rates “definitely by July.”
“June is a bit ‘if-ish,’ not because of the domestic economic conditions,” he said. “If it were only up to the U.S. economy the Fed would hike in June.”
El-Erian said that while parts of the U.S. economy show a green light towards raising interest rates, the global economic outlook and the “BREXIT referendum” in June are factors in the Fed’s decision.
“If you look at the rest of the world you have China’s soft-landing with imbalances still there," El-Erian said. “You have Russia and Brazil in recession. You have Europe and Japan that are giving up some of the cyclical gains, so it’s not a great global economy. So any policy mistake outside or a small market accident and that could be a significant headwind. That is what the Fed is worried about.”
El-Erian also commented on the current economic crisis and political unrest in Venezuela.
“They [Venezuela] shouldn’t be anywhere near where they are today,” he said. “Is it a major systemic risk? No. It’s a big problem for the Venezuelans, but it’s not a major systemic risk. What we’re seeing throughout the region is a shift to right-wing politics. If you look at what’s happening in Brazil, in Chile, in Argentina—potentially in Venezuela—you’re seeing somewhat of a shift away from populist, fiscally irresponsible policies towards more right-wing policies.”
However, despite several global economic trouble spots, El-Erian said the odds of a recession are low.
“If you extend it to 2017, I would put the probability of a recession in 2017 at about 30%,” he said. “So it’s not an overwhelming probability. It’s a risk and something that we should look at. And again, the risk is from outside the U.S. and that’s important to recognize.”