El-Erian: Fed will have to hike rates again next month or risk appearing politically influenced

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The Federal Reserve next month will be forced to hike interest rates for a fourth time in 2018 or risk being seen as politically coerced, economist Mohamed El-Erian told CNBC on Tuesday.

“It is very hard for the Fed right now to go back to three hikes,” the chief economic advisor at Allianz said on “Squawk Box.” “If they don’t [hike], the market is going to say the economy is much weaker than we anticipated and/or the Fed is much more open to political intervention.”

President Donald Trump has repeatedly expressed frustration with the Fed’s moves to raise rates, arguing the central bank could disrupt the U.S. economic recovery. Trump told the Wall Street Journal Monday, “I think the Fed right now is a much bigger problem than China” trade relations.

Fed Chairman Jerome Powell said early last month the cost of borrowing money was a long way from so-called neutral, sparking concerns about a more aggressive Fed tightening that led to October being the worst month for the S&P 500 since September 2011. The market rout spilled over into November, with the S&P 500 down 1.41 percent for the month as of Monday’s close.

The central bank has raised interest rates three times this year and the market expects another one in December. After its most recent hike, in September, the Fed projected three rate increases in 2019.

El-Erian, formerly CEO of Allianz-owned Pimco, said the Fed rate decision next month will be “a real test as to whether the power of the Fed is indeed a different Fed or whether at the first sign of market volatility they flinch.”

“The Fed has put itself in a bit of a box and will have to go through with four hikes,” he stressed.

In a July interview on CNBC, El-Erian said the Fed would likely attempt to ignore the president’s criticism. He reiterated those sentiments Tuesday, but recognized the power of perception may be too great.

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