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Mohamed El-Erian talks rate hikes, future of the Fed, state of housing

Chief economic advisor at Allianz shares economic views at MBA Annual

Before Department of Housing and Urban Development Secretary Ben Carson and Federal Housing Finance Agency Director Mel Watt talked about the state of housing finance reform, the government’s involvement in mortgage lending moving forward, and other housing finance issues, Mohamed El-Erian shared his views on some of those issues with the crowd at the Mortgage Bankers Association Annual Convention in Denver.

El-Erian, the chief economic advisor for Allianz and the former chief executive and co-chief investment officer at PIMCO, told the crowd that any concerns over the impact of future rate hikes from the Federal Open Markets Committee, the future leadership of the Federal Reserve, and the looming shrinking of the Fed’s balance sheet are unwarranted.

Basically, the way El-Erian tells it, regardless of who President Donald Trump picks as the next Fed chair, there will still be a rate hike in December, and possibly a few more next year, but at this point, the markets have learned how to deal with rate hikes without significant disruption.

“Expect the Fed to hike interest rates in December. We may get a couple of rate hikes next year, regardless of who leads the Fed,” El-Erian said. “You should not worry about the Fed. I say that even though we don’t know who's going to be chair or vice chair.”

Recently, the Wall Street Journal reported that Trump now has five finalists to serve as the next Fed chair, including current Fed Chair Janet Yellen.  A few months ago, Trump said that keeping Yellen as Fed chair is certainly a possibility, but added that Gary Cohn, who currently serves as the White House National Economic Council Director, is also a possibility to lead the Fed.

The other rumored candidates are former Fed governor Kevin Warsh, former Department of the Treasury official Jerome Powell, and Stanford University economist and former Treasury official John Taylor.

When discussing the future of the Fed, El-Erian said that while he has no idea which way Trump is going to go, he’s not concerned by any of the choices.

“Out of the five options, I don’t think there’s a bad choice,” El-Erian said. “That doesn’t keep me up at night.”

As for the Fed planning to reduce its balance sheet, which is set to begin soon, El-Erian said the process will be about as uneventful as possible.

“The Fed shrinking the balance sheet will be like watching paint dry,” El-Erian said. “It will be as boring as possible.”

Later during El-Erian’s session, he sat down for a question-and-answer session with Betty Liu of Bloomberg Television, during which they discussed the housing market and other items of note.

As for what’s holding back homeownership, El-Erian said that low wage growth is one of the main issues.

“Income is not keeping up with rising home prices and the gap is growing,” El-Erian said. “The industry needs desperately income growth. We’ve gone as far as we can go on artificially low interest rates. Income growth is so important to so many parts of the economy.”

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