Mohamed El-Erian
Olivia Michael | CNBC
According to Allianz Chief Economic Adviser, Mohamed El-Erian, calling inflation “transient” is a historically bad move for the Federal Reserve.
“The characterization of transient inflation is perhaps the worst inflation call in the history of the Federal Reserve, and it leads to a high probability of a policy mistake,” the former CEO said. Pimco and now Queens University president ‘said Sunday on CBS’ “Facing the Nation.”
“So the Fed must quickly, starting this week, regain control of the inflation narrative and regain its own credibility,” he added. “Otherwise, it becomes a driver of higher inflation expectations that themselves eat into.”
El-Erian’s comments came shortly after the Labor Department reported that the consumer price index, a broad-based measure of inflation, up 6.8% from a year ago in November.
While the number was only slightly above Wall Street’s expectations, it still marked the biggest move in 12 months since 1982, back when the US was battling its worst inflation yet. they’ve seen. Even excluding food and energy prices, the CPI rose 4.9%, the biggest increase in 30 years.
Fed officials have long said that they expected the increase in inflation to be only “transient”, as it is driven by supply chain and demand factors largely related to the pandemic. However, the Chairman of the Fed Jerome Powell recently said it time to retire from as it tends to confuse the public.
El-Erian said the Fed’s recognition that price pressures won’t go away is essential to making the right policy decisions.
“If they catch up now, if they are honest about their mistake and take steps now, they can still regain control of it,” he said.
Changes are coming
The Federal Open Market Committee, the body that sets interest rates for the central bank, will meet this week amid expectations that it will start pressing the brake more about its extremely easy monetary policy. A key step is the decision to potentially speed up the cut in monthly bond purchases, aimed at boosting the economy and keeping interest rates low.
However, markets expect that rate hikes are still several months away and won’t materialize at least until bond buying stops altogether, possibly around March.
El-Erian said it’s more important for the Fed to “relax on the accelerator” rather than tighten policy quickly.
“There is a possibility that they will have to increase their rates,” he said. “Look, it’s important to prevent inflation from being embedded in the system because two things happen when inflation is embedded. First, you lose purchasing power and the poor suffer the most. Second, you get overreacted by the Fed and then you have a recession and then you lose income. So you really want to navigate this process in a timely and orderly manner.”
According to CME’s FedWatch, the market is fixing a roughly 58% chance of a first quarter percentage rate hike in May 2022, followed by two more before the end of the year, according to CME’s FedWatch.
For their part, Fed officials who concluded Wednesday’s meeting will provide their latest forecasts for interest rates, as well as unemployment and GDP growth. The forecasts are expected to be more in line with market expectations, although policymakers will likely emphasize flexibility that will depend on the data.
