El-Erian urges Fed hold as DXY holds $100.93 support

Mohamed El-Erian says the worst of U.S. inflation is behind and the Federal Reserve should maintain its wait-and-see posture on rates.

The worst of U.S. inflation has passed, giving the Federal Reserve room to maintain its wait-and-see posture on interest rates, according to Allianz chief economic advisor Mohamed El-Erian.

"The worst of inflation is behind us, so the Fed should stay in wait-and-see mode," El-Erian said Tuesday in a CNBC "Squawk on the Street" interview.

The U.S. dollar index held at $100.93 on Tuesday, testing the 0.618 Fibonacci retracement zone after breaking out from the $97.67 low, while sterling traded at $1.3380 against the greenback. The dollar's relative strength index hovered around 58, maintaining a neutral-to-bullish bias on the daily timeframe, with the next Fibonacci extension near $103.09. Core inflation remains elevated, though El-Erian argued the worst of the price pressures have dissipated.

El-Erian's assessment aligns with New York Fed President John Williams, who said the central bank's policy stance remains "well positioned." The Fed next meets in late July, with markets pricing a continued hold as officials assess whether inflation is on a sustainable path toward the 2% target. If El-Erian is correct that inflation pressures are easing, the central bank could avoid further tightening — a scenario that would support risk assets across equities and cryptocurrencies.

The comments from El-Erian, one of the most closely followed voices on central bank policy, come as the Fed under Chair Kevin Warsh pursues a broader re-evaluation of its approach. El-Erian warned that Warsh's leadership suggests a "similar re-evaluation" of what he called "excessive data dependency" — a shift away from relying too heavily on each incoming economic data point toward a more forward-looking framework that considers longer-term trends.

The last time the Fed undertook such a strategic re-evaluation was in 2020, when it adopted average inflation targeting, a framework that allowed rates to stay lower for longer. That shift preceded a sustained rally in risk assets, with the S&P 500 gaining about 20% over the following six months. A similar pivot now could have comparable implications for market pricing, though the current inflation environment differs from the pandemic-era disinflation.

The dollar's resilience at $100.93 reflects expectations that the Fed will hold rates steady as other central banks move in different directions. The European Central Bank continues its push toward price stability as divergent fiscal settings persist across the euro zone, while the Bank of England weighs services inflation against softening economic growth. Sterling's test of the descending trendline at $1.3380 on the four-hour timeframe illustrates the sensitivity of currency markets to relative policy expectations, with the pound forming bullish rejection wicks at that level.

What the Fed's Hold Means for Risk Assets

For equities and cryptocurrencies, El-Erian's view that inflation pressures are easing could reduce the likelihood of further tightening, potentially supporting prices. The dollar's status as a reserve currency, combined with domestic demand dynamics, continues to sustain its relative strength even as other economies face more acute growth-inflation trade-offs.

However, the wait-and-see posture also implies no imminent rate cuts, which may cap speculative rallies in the near term. The absence of a clear easing bias means investors cannot price in the kind of liquidity-driven rallies that followed previous tightening cycles. The next Fed meeting in late July will provide the clearest indication of whether the central bank shares El-Erian's assessment that the worst of inflation is truly behind, or whether it sees reason to maintain a more cautious stance.

This article is for informational purposes only and does not constitute investment advice.