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Mohamed El-Erian: The Fed is on a 'beautiful normalization,' and no chair would mess with it

  • The U.S. Federal Reserve is on a "beautiful normalization" and the next chairperson wouldn't want to mess that up, Allianz's chief economic adviser Mohamed El-Erian said
  • Easy monetary policy in the U.S. is being scaled back without disrupting markets and the global economy, which should continue regardless who takes over as Fed chair, El-Erian said

The U.S. Federal Reserve is on a "beautiful normalization" that balances rising interest rates and the stability of markets and the economy — something the next chairperson, whoever it will be, would not want to disrupt, Allianz Chief Economic Advisor Mohamed El-Erian said Thursday.

President Donald Trump is expected to nominate the next Fed chair on Thursday U.S. time. Current Fed governor Jerome Powell is seen as the front-runner for the job.

"The Fed's embarked on this beautiful normalization: It has stopped [quantitative easing], it has raised rates, it has declared a path to reduce its balance sheet without disrupting markets and without derailing the global recovery. And I don't think anybody will want to mess with this beautiful normalization," El-Erian told CNBC during the 2017 Barclays Asia Forum in Singapore.

That means that "nothing will change" in the short term, El-Erian added, with the Fed expected to raise interest rates in December and to continue pressing ahead with winding down its balance sheet.

Acknowledging that investors have been over-complacent with high levels of returns, El-Erian said a major uncertainty is whether more central banks can deliver a "beautiful normalization" like the Fed.

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The European Central Bank and Bank of England are major central banks that are looking to scale back their accommodative policies in the near term. The Bank of Japan and the People's Bank of China are also expected to follow suit sometime in the future.

"I think there's a major disconnect between how comfortable the markets are and the reality ... part of the complication is what happens when more than one systemically-important central bank starts normalizing," he said.

But the complacency in markets look likely to stay, unless there is a major shock, said El-Erian. That could include a major geopolitical event, a big policy mistake or an accident in segments of the market that are well over-exposed.

"I think the market has been conditioned to continue with a very profitable trade, so you need a major shock, or a major series of shocks to change that conditioning," he said. "It has to be something major, small things will not derail this market."