Podium vs Print: "the wrong policy measure" and 4.22%

The podium. Mohamed El-Erian, Allianz’s chief economic adviser, expects the Federal Reserve to raise rates further, and thinks it should not. “My problem is that it’s the wrong policy measure right now,” he told CNBC on Monday¹. The answer to inflation worries and higher Treasury yields, he said, should be “fiscal containment, not monetary tightening”¹. He warned that housing, car loans and consumer loans would take the hit¹.

The print. The US Treasury’s daily par yield curve shows the three-month bill at 4.22% at Tuesday’s close and the two-year note at 4.70%². The Fed’s target range has been 3.75%–4% since September’s quarter-point rise¹. Desk arithmetic: the bill yields 0.22 points more than the top of that range. Since 2 January the three-month yield has risen 0.57 points, from 3.65%, and the two-year 1.23 points, from 3.47%².

The gap. The podium debates whether the Fed should tighten. The print says the market has already done much of it. A three-month bill that pays more than the Fed’s ceiling is a bet that the ceiling will rise before the bill matures. Fed funds futures agree: about a 10% chance of a rise tonight, and better than 80% for December, according to CME Group’s FedWatch tool as cited by CNBC¹. Consumer prices rose 3.7% in the year to September¹.

The verdict. El-Erian’s argument is about what policy ought to be; it deserves a hearing, and the Fed will give it one. But your borrowing costs are not set by speeches, his or Warsh’s. They are set every day in auctions like the bill’s. Mortgage rates are above 7%¹, and the ten-year yield rose to 5.02% in Asian trading³. The useful habit is the dull one: if you have cash, check what a three-month deposit or bill pays you; if you have debt, check which of it floats. Nothing here is investment advice.