US bond markets rallied on Wednesday, with the benchmark 10-year Treasury yield falling nearly 4% as expectations for a less aggressive federal reserve started to grow. The greenback also lost momentum as the dollar index slipped below the 110 mark.

However, alliance Chief economic adviser and well-known economist Mohamed El Erian he said federal reserve would not be satisfied with the resulting financial situation.

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What happened: “Treasury yields and the #dollar continue to fall ahead of the US market open – both in response to the #markets happily subscribing to the view that the #FederalReserve will slow its rate hike cycle… and its price impact now way beyond that goes beyond #stocks,” El-Erian said on Twitter.

“The resulting easing in financial conditions, which is self-feeding, may not be what the #Fed wants to see at this time.”

Stocks and bonds have been hit by the Fed’s aggressive actions and policy guidance this year. That SPDR S&P 500 ETF Trust SPY has lost over 20% so far in 2022 while the Vanguard Total Bond Market Index Fund ETF BND has lost over 16%.

Financial Stability: The central bank is expected to be less hawkish going forward, although a 75 basis point rate hike has been priced in by market participants.

“[Paul] Volcker dealt with growth and inflation. [Fed] Chair Powell also has financial stability,” El-Erian said said Bloomberg Television on Tuesday.

If the central bank deviates from its current restrictive policy, “it will be because of financial stability. It won’t be because they’ve decided to stop paying attention to inflation,” he said.

El Erian said earlier this month that the central bank “made two big mistakes that could go down in the history books”.

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photo Courtesy: International Monetary Fund on Flickr