Noted Economist Says ‘Collateral Damage’ Is Coming From Fed’s Slow Inflation Response

Noted Economist Says ‘Collateral Damage’ Is Coming From Fed’s Slow Inflation Response
Mohamed El-Erian, chief economic adviser of Allianz, at FOX Studios in New York City, on April 29, 2016. (Rob Kim/Getty Images)
Bryan Jung
8/9/2022
Updated:
8/9/2022
0:00
The Federal Reserve risks undermining its credibility if its monetary policies fail to reign in high inflation, warned Mohamed El-Erian, the well-known economist and former PIMCO chief executive,  in an interview with Yahoo! Finance on Aug. 7.

He blamed the central bank’s initial late response to the inflation crisis for potentially hurting its own reputation.

Inflation hit a 41-year high in June, pushing the Fed to hike interest rates by 75 basis points in its last two monthly meetings in order to control prices.

However, El-Erian did not think it was enough, commenting “we’ve got to get control of the inflation beast.”

“The Fed needs to act not only in tightening its monetary policy but also in gaining credibility. Its forward guidance right now is almost meaningless—and that’s not a good thing.”

He believes that the Fed should continue a hawkish stance to rebuild its credibility, after low interest rates and cheap monetary policy accelerated a stock market bubble last year.

Fed Chairman Jerome Powell, back in 2021, downplayed rising inflation as “transitory,” but later backtracked on that statement a few months later, in 2022, after admitting that he misread the signs, as monthly inflation rates continued to increase.

Powell has since announced that central bank officials will likely take a data-driven approach to future policy decision making.

“What I’m most worried about,” said El-Erian, “is the collateral damage that’s going to be associated with inflation coming down because the Fed has been so late in responding.”

Some ‘Sticky’ Inflation

El-Erian predicts that inflation will come down by the end of 2022, due to higher interest rates, but that it “will be sticky,” and that the CPI will continue to exceed the Fed’s target of 2 percent.

The latest Consumer Price Index (CPI) reading came in at of 9.1 percent for June, its highest level since November 1981, and the figures for July are expected to be released on August 10.

“I’m looking for a core CPI in the 4.5 percent to 5.5 percent range, so well above the 2 percent target of the Fed,” he said

He predicted that the core CPI will unfortunately remain “stubbornly high” for now and “that just speaks to an inflation process that has become more entrenched and has become more broad based in our economy.”

Energy and food prices have been the biggest drivers of inflation in 2022, which have been exacerbated since the Russian invasion of Ukraine.

“Energy and food, in particular, are going to be much weaker drivers of inflation, so the headline number is going come down,” said El-Erian.

West Texas Intermediate futures fell below $90 per barrel this week, for the first time since the conflict in Ukraine began, which should help alleviate inflation.

Oil prices have come down considerably from their peak earlier this year, which should help alleviate inflation, but there is concern they will spike again after the summer.

“What I’m most worried about ... is the collateral damage that’s going to be associated with inflation coming down because the Fed has been so late in responding,” said El-Erian.

A slowdown in the U.S. economy and signs that inflation may be reaching its peak have some economists wondering whether the Fed will decide to ease its hawkish stance on tightening monetary policy.

The government report on U.S. employment figures released last week showed the job market at an all-time high, which could prompt the Fed to continue raising interest rates.

However. some analysts are skeptical of the official data, pointing out a stark divergence between the Household and Establishment surveys that make up the monthly jobs report.

Household numbers since March have been sliding, while the establishment figures rose every single month, noted Tyler Durden of Zero Hedge, a financial blog.

Durden believes that, in reality, full-time employment is actually falling, while Americans holding multiple jobs are rising to all-time highs, which is not the sign of a strong job market.

“So what’s going on here? The simple answer: Fewer people working, but more people working more than one job, a rotation which picked up in earnest some time in March and which has only been captured by the Household survey,” said Durden.

Bryan S. Jung is a native and resident of New York City with a background in politics and the legal industry. He graduated from Binghamton University.
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