El-Erian: Divergent Central Bank Policies May Spell Danger

Friday, December 12, 2014
By Paul Martin

By Dan Weil
Thursday, 11 Dec 2014

Global economies are moving at different speeds, creating a divergence in central bank policy that could cause trouble next year, says Mohamed El-Erian, chief economic adviser at Allianz.

The U.S. economy will strengthen, he writes on Project Syndicate. Chinese growth will stabilize at a level lower than recent averages, and Europe will struggle, El-Erian says.

“This multi-speed economic performance will contribute to multi-track central banking, as pressure for divergent monetary policies intensifies,” he writes.

The Federal Reserve will probably start raising interest rates in the third quarter, while the European Central Bank conducts quantitative easing, and the Bank of Japan maintains its “pedal-to-the-metal monetary stimulus,” El-Erian says.

The divergence means a stronger dollar, he writes.

“The problem is that exchange-rate shifts now represent the only mechanism for reconciliation, and the divide between certain market valuations and their fundamentals has become so large that prices are vulnerable to bouts of volatility.”

The dollar already has hit a seven-year high against the yen and a two-year high against the euro this month.

“As it becomes increasingly difficult for currency markets to perform the role of orderly reconcilers, friction may arise among countries,” El-Erian writes. “This could disturb the unusual calm that lately has been comforting equity markets.”

The Rest…HERE

Leave a Reply

Join the revolution in 2018. Revolution Radio is 100% volunteer ran. Any contributions are greatly appreciated. God bless!

Follow us on Twitter