The Federal Reserve must be careful not to be scared by the rise in interest rates due to market volatility, or investors will soon bet on a "Powell put", said Mohamed El-Erian, Allianz chief economist.
The Fed's most recent message, delivered by Fed Vice President Richard Clarida, emphasized that the Fed depends on the data. This seems to be a change from the previous communication that there was a clear need to normalize the policy, said El-Erian, the former deputy director of the International Monetary Fund and then the CEO of PIMCO. This change seems to be a reaction to the volatility of the market in October rather than any "big discovery" about the economic outlook, he said.
Read: Clarida from the Fed says it wants more interest rate increases, but not how many
Until Monday, the Dow Jones Industrial Average.
has fallen 8% since its peak in October, and the S & P 500
SPX, + 0.00%
It has decreased by 9%.
"In the last week, more or less, the word data dependency has started to come back. "So this will be a real test to determine if Powell Fed is really a different Fed or if at the first sign of market volatility they flicker like the Bernanke Fed and the Yellen Federal Reserve."
"If they indicate that they are going to be more moderate, I can tell them that we will talk about the Powell put very soon, so they have to be very careful," he added during an interview on CNBC.
Investors have talked about a Fed safety net for stocks since the stock market crash in October 1987, which led the central bank led by Alan Greenspan to lower interest rates. A real position acts as an insurance policy against a market crash by giving the holder the right to sell the underlying asset at a fixed price. Later he was nicknamed the "Bernanke post" and then the "Yellen post", referring to former Fed chiefs, Ben Bernanke and Janet Yellen.
Watch: A & # 39; Powell put & # 39; for the stock market? Do not even think about it
The Fed has indicated that it will see an increase in the rate in December and three more movements next year, which would bring the federal funds rate to a range between 3% and 3.25%. The markets now believe that the Federal Reserve will stop below 3%.
El-Erian said that Clarida's message is that the Fed will increase rates in December, but that next year they could converge to what the market expects instead of the three movements that they have indicated previously.