Central Banks Running Out of Ammo is Real Concern Says El-Erian

The nosedive in the Chinese stock market and the slowdown in the world’s second-largest economy will certainly be front and center for global investors in the near term, but there’s a more important shift underway, economist Mohamed El-Erian said Friday.

The bigger issue for financial markets is that central banks are running out of ammo, the Allianz chief economic adviser told CNBC. “Markets are realizing that central banks can no longer repress financial volatility. And they are repricing to new volatility paradigm,” he said in a “Squawk Box” interview.

To that end, any shocks to the markets will take longer to reverse themselves, said El-Erian, former Pimco co-CEO. “What we’re going to see is every time something happens in the world it’s going to take longer to restore stability. That’s what we’re seeing with China today.

El-Erian said it’s a good thing the Federal Reserve is starting to normalize monetary policy. “They realize that they can’t artificially repress financial volatility.”

“What’s not a good thing,” he continued, “is we’re not doing the other things that need to unleash the productive capacity of the economy.”

The government needs to improve fundamentals to “validate financial assets,” El-Erian said.

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza