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    El-Erian Warns of Premature Optimism Around US Economy

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    Optimism is growing around the US economy as the stock market continues to rally and the Federal Reserve's recent communique on inflation and interest rates suggested a more dovish stance. However, top economist Mohamed El-Erian has warned that this optimism may be premature, and that the US is facing a 75% chance of inflation rebounding or remaining abnormally high this year.[0]

    El-Erian warned of a 50% probability of inflation remaining “sticky” at 3%-4%, and a 25% chance of prices bouncing back sharply and causing a “U inflation” scare.[1] He added that the Fed's 2% inflation target was “arbitrary,” and that the best way to deal with a temporary inflation scare was to simply wait it out.[0]

    Investors have priced in just a few more rate hikes before the central bank stops tightening its policy, and the S&P 500 has extended its 2023 gains to almost 9%.[1] A less aggressive Fed could reduce the potential severity of the widely anticipated US economic slump and be less damaging for corporate earnings and valuations.[2]

    But El-Erian has warned that the optimism may be misplaced and that the Fed could end up crushing the economy as it struggles to rein in soaring prices.[1] His warning echoes the views of other bearish commentators, who have warned that inflation may not be over just yet and could flip the stock market upside down.[1]

    0. “Inflation has a 75% chance of rebounding or remaining high, top economist warns” Fox Business, 10 Feb. 2023, https://www.foxbusiness.com/economy/inflation-chance-rebounding-remaining-high-top-economist-warns

    1. “Inflation has a 75% chance of rebounding or staying high, and the Fed could crush the economy in its attempt t” Business Insider India, 9 Feb. 2023, https://www.businessinsider.in/stock-market/news/inflation-has-a-75-chance-of-rebounding-or-staying-high-and-the-fed-could-crush-the-economy-in-its-attempt-to-fight-it-mohamed-el-erian-says/articleshow/97783747.cms

    2. “Top economist Mohamed El-Erian says markets are embracing a ‘soft landing' scenario, with US 2-year bond yield” Business Insider India, 3 Feb. 2023, https://www.businessinsider.in/stock-market/news/top-economist-mohamed-el-erian-says-markets-are-embracing-a-soft-landing-scenario-with-us-2-year-bond-yields-in-a-post-fed-plunge/articleshow/97584605.cms

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