Mohamed El-Erian, president of Queens' College, Cambridge, contends that investors are misjudging the extent of future rate cuts by the European Central Bank (ECB) compared to the Federal Reserve (Fed). Despite the Eurozone's considerably weaker economy, interest rate swaps indicate that traders are betting on the ECB cutting its benchmark rate by about 140 basis points by September 2025, mirroring expectations for the Fed.
This outlook contrasts starkly with the differing economic conditions of the two regions, with the U.S. economy having grown by 3% in the last quarter, while the Eurozone managed just 0.2%. El-Erian believes that the ECB's rate reductions will likely exceed those of the Fed.
Recently, the ECB executed its third rate cut of the year, lowering the key deposit rate by 25 basis points to 3.25%. However, officials have not specified the timing and pace of future rate cuts. El-Erian agrees with former colleagues from Pimco who find European bonds, like German Bunds, and UK bonds appealing.
Regarding the U.S., El-Erian reiterated that the Fed should not overly focus on each economic data point when making policy decisions.
