The Federal Reserve announced plans to start reducing its $4.5 trillion balance sheet next month with Fed Chair Janet Yellen saying it is a vote of confidence in the economy.
“We think the economy is performing well and we have confidence in the outlook for the real economy,” she said during a press conference following the Fed’s decision.
Despite concerns about the economic impact of unwinding such a large balance sheet, Allianz Chief Economic Advisor Mohamed El-Erian told the FOX Business Network’s Maria Bartiromo on Mornings with Maria that “The Fed intends to make it as unexciting as possible. They really want to make it as if we are going to watch paint dry: dull, predictable, that’s how they want to make it. And I think they are going to succeed because they are going to go so slow.”
On the other hand, El-Erian pointed out the market impact of the Fed signaling a rise in interest rates.
“More interesting Maria is that the Fed continues to signal higher interest rates than what’s priced into markets and we saw some reaction yesterday – bond yields have gone up, the dollar has strengthened as markets are starting to realize that the Fed still has a December rate hike on its radar screen.”
But when Bartiromo asked about the impact of higher interest rates on the U.S. economy, El-Erian responded, “I don’t think they crash the economy, I also don’t think they slow the economy. Why? I think that there is momentum in this economy, not great momentum, but strong enough momentum that [there is a] potential upside if we get tax reform done.”