Next year could see the Federal Reserve become more strategic and hawkish about rate hikes contrary to many analysts’ and investors’ expectations, Allianz’s chief economic advisor, Mohamed El-Erian, told CNBC.
“For the first time in a very long time, I think the market is underestimating how much the Fed will actually hike,” El-Erian said Wednesday on “Squawk Box.” “We’re getting out of the world in which the Fed is the only game in town policy-wise.”
The economist said he believed the central bank’s consensus for three rate hikes in 2017 was a minimum amount. “If it’s not three [hikes], it’s because it’s more than three,” he said.
El-Erian said the Fed’s hawkishness will stem from a more positive outlook on incoming economic policy and the condition of the U.S. economy next year.
“I think the Fed will become more strategic,” he said. “[It’s] going to be comfortable about the overall state of the economy, it’s going to see a fiscal expansion coming, and it’s going to be less data-dependent and more strategic.”
And, while the Fed will likely not act on its expected rate hikes in January as it watches how the administration of Donald Trump is received on Capitol Hill, that won’t determine its course for the rest of the year, he said.
“Don’t underestimate their inclination to normalize after too many years at artificial low rates,” El-Erian said.