Top economist Mohammed El-Erian warns markets got ‘drunk on support’ from central bank ‘BFFs’, and now he’s more comfortable keeping his fortune in cash

El-Erian is the chief economic advisor at Allianz, the parent company of Pimco, and said recent central bank boosts to interest rates mean cash and cash-like assets are producing strong yields—and stocks and bonds are struggling.

“The markets got drunk on central bank support,” El-Erian told host Claer Barrett. Given low interest rates, the market “believed that central banks would be our BFFs—our best friends forever—but once inflation appeared they were no longer our friends.”

Double-edged sword

High interest rates are a doubled-edged sword for the public: although it makes major purchases like housing more expensive, it also leads to greater returns on savings held in bank accounts.

Interest rates in the U.K., where El-Erian is based, has spiked in the past two years. As of December 2021 the base rate sat at 0.1%, steadily climbing to 5.25% as of September 2023.

In the U.S. the story is similar: the Fed has hiked rates to their highest level in 22 years, currently sitting at between 5.25% and 5.5%.

Echoing previous warnings from Citigroup CEO Jane Fraser, El-Erian said he believes the road to get inflation under control—having ballooned at 9.1% in June 2022 in the U.S. and at 9.6% in the U.K. in October 2022—has its toughest time ahead.

“Inflation is likely to be sticky and interest rates will have to stay higher for longer,” El-Erian, the president of Queens’​ College, Cambridge, told the Financial Times in a podcast.

The journey to return to lower inflation will be “painful” warned El-Erian, saying the last mile to get back to a target level of 2%—signaling corresponding, consistently high interest rates—will be “complicated.”

Changed world

“The world we live in, from an economic perspective, has changed,” the former PIMCO CEO told The Money Clinic.

El-Erian noted the “good old days” have “reversed in a violent manner,” explaining stock portfolios and bonds have sunk in tandem where usually they work inversely, thus balancing out risk and volatility.

In that context, he said, it was “very very unsettling” to see bonds, the bedrock for the world’s financial market, beginning to falter.

The U.S. Treasury market—the foundation of much of the global financial system—is currently seeing a 16-year-high in its 10-year bond yields. The selloff isn’t just a headache for U.S. officials, as an increase in the cost of borrowing in the U.S. also lifts costs around the world.

Interest rates upside

Higher rates may be bad news for Wall Street, but savers can look forward to a silver lining thanks to central banks.

El-Erian added it’s a benefit everyone should be aiming to make the most of, as saving should always be made a priority.

“Now what to do if you’re worried about the market,” the University of Pennsylvania Global Fellow continued. “The good news of high interest rates is you actually can get something on bank deposits. I would encourage people to look at different banks, at different savings instruments.

“If you are uncomfortable in the stock market—as I am—then there’s a really good place to park your money where you can get paid 4% to 5% on your money and that will compound.”

New data suggests that a large proportion of the U.S. public may indeed benefit from higher rates. Previously analysts believed that the war chests compiled by consumers during the pandemic had run dry.

However this week revised government data revealed that savings rates prior to the pandemic were lower than previously thought, thus meaning the drop-off post pandemic has not been as steep.

The update caused JPMorgan Chase & Co. analysts to up their estimate of the savings buffer to $1.2 trillion, from $400 billion, Bloomberg reported. “Excess saving may not be exhausted until sometime next year,” they reportedly wrote in a report on October 6.

“I’m keeping an open mind,” El-Erian said, when questioned about when he may up his equity stakes across his portfolio. “The time will come when I’ll be much more comfortable increasing my equity exposure but I’ve been quite cautious.”