Wednesday, November 15, 2017

White House Considering Nomination of Mohamed El-Erian for Federal Reserve Vice Chairman

The White House is considering Mohamed El-Erian for vice chairman of the Federal Reserve, a source confirmed to CNBC.

El-Erian is
the chief economic advisor at Allianz. He would take the seat vacated in October by Stanley Fischer.

The search process has just begun and the vice chair announcement is not likely this year, said CNBC's source.

El-Erian should be considered a monetary mechanic like the rest of them. In a recent Bloomberg article he wrote when commenting on President Trump's nomination of Jerome Powell to head the Fed:
Powell would bring to the position a sense of continuity and predictability that is beneficial for the successful maintenance of the “beautiful normalization” process that has allowed the Fed to gently and gradually step back from unconventional monetary policies without destabilizing markets or derailing the pickup in U.S. and synchronized global growth. This process is likely to continue with an interest rate hike in December -- an outcome made more likely by the statement from this week’s Open Market Committee meetings -- and the implementation of the phased reduction in the balance sheet outlined earlier by the Fed...

As chair of the FOMC, Powell’s success would also hinge on other appointments to the board, particularly the way those reinforce the Fed's economic, finance and market expertise, as well as global experience and exposure. This mix is likely to prove vital as the central bank navigates three major trade-offs: between monetary and fiscal policies; between financial regulation and deregulation; and between liquidity support for markets and the back-up provided by better fundamentals. It is also key to ensure the Fed can continue as the leader of global monetary policy determination, particularly as other systemically important central banks are starting to face their own policy-transition issues...

Look for the financial markets, as well as the global system as a whole, to welcome and embrace Powell’s nomination, and for good reasons. When supplemented by other key appointments, it reduces the risk of monetary-policy discontinuity and offers the prospects of keeping the Fed as an anchor for financial stability and economic recovery amid considerable global uncertainties.
In other words,  El-Erian has no clue as to the dangers that lurk around the corner. Though in a September column, he did hedge about Fed "normalization.":
Investors and traders are sanguine about the initiation of the balance-sheet reduction, having already navigated in an orderly fashion the termination of the Fed's program of large-scale security purchases and three rate hikes. As an illustration, the VIX -- a widely followed indicator of market volatility commonly called the "fear index" -- was trading down at 10.15 on the eve of this week's FOMC meeting, after fluctuating in a range of 8.84 to 23.01 in the last 12 months.

Several factors are contributing to this notable market calm. The global economy is in the midst of a synchronized growth pickup, though it is far from impressive and below what it is capable of (and needs). Judging from remarks of Fed officials, the central bank remains keen to avoid market disruptions. Meanwhile, the European Central Bank and the Bank of Japan continue with their large purchases of market securities.

All this serves to fuel the adaptive expectation process that has created high market confidence that central bankers are able and willing to deliver a "beautiful normalization" -- to adapt a phrase coined in another deleveraging context by Ray Dalio, the founder of the hedge fund Bridgewater -- starting with the Fed, the world's most powerful and influential monetary institution. That is, they will manage a slow and orderly exit from unconventional measures that neither derails economic growth nor causes financial instability.

This unprecedented and delicate policy maneuver is far from an automatic...

For now, markets will continue to treat the Fed's normalization as the equivalent of watching paint dry: a slow, uneventful and relatively predictable process. Whether such expectations are validated over the longer term, however, is far from clear.
What's missing from El-Erian commentary is any guiding economic theory, good or bad,. He is a tape watcher.  He will spot a trend once it already displays itself in price action. He is no Stanley Fischer.