(MSN) - The Federal Reserve will be forced to give up its aggressive monetary policy after Silicon Valley Bank's meltdown, according to Mohamed El-Erian.
The chief economic adviser at Allianz pointed to plunging US bond yields as a key sign the central bank could halt its interest-rate increases aimed at cooling inflation.
- The Federal Reserve will be forced to end its interest-rate hikes following SVB's collapse, according to Mohamed El-Erian.
- "The immediate move in 2-year bonds points to the view that, by treating this as a systemic threat, the #Fed will also retreat from its #inflation battle," the top economist said.
- SVB's collapse is seen as a byproduct of the Fed's jumbo rate hikes over the past year.
"With the US #SVB-related bailout going beyond what many expected, markets see it as more than protecting deposits and small #tech," El-Erian said in a Monday tweet.
"The immediate move in 2-year bonds points to the view that, by treating this as a systemic threat, the #Fed will also retreat from its #inflation battle," he added.
Financial markets are in turmoil after the Santa Clara-based Silicon Valley Bank (SVB) was shut down on Friday. Federal regulators then announced Sunday that they would bail out the bank's customers. The collapse was a byproduct of the Fed's fastest interest-rate increases since the 1980s, a botched fundraising plan by SVB and a subsequent rush of depositors to withdraw their money.
SVB's dramatic implosion showed that the Fed's jumbo rate-hike campaign could destabilize even institutions that were once thought to be relatively stable.
Given that, investors are now anticipating the Fed to temper its hawkish monetary policy stance to prevent further damage to the financial system. On Monday, such expectations fueled the sharpest slide in the 2-year Treasury yield since the financial crisis of 2008.
The yield on the 2-year Treasury note slid about 45 basis points to 4.214% at last check on Monday – its lowest level since February 3.
"This roller coaster yield curve is a reflection of economic, financial and policy volatility which, looking forward, will need time to settle down," El-Erian said in a later tweet.
By Zahra Tayeb
March 13, 2023
