- Mohamed El-Erian once again took aim at the Federal Reserve over its lateness in fighting inflation.
- The risks associated with the lack of “first best” measures are compounded by instances of confusing communication coming from the Fed, he said.
- Erosion of the Fed’s credibility makes for less effective policy guidance moving forward, he added.
Top economist Mohamed El-Erian has once again taken aim at the Federal Reserve over its lateness in fighting inflation and underscored the threat of the institution’s credibility being chipped away.
In a tweet on Monday, El-Erian flagged risks tied to the Fed not making the “first best” measure in handling the US economy, coupled with the central bank’s instances of “confusing communication” that’s eroded the power of its forward policy guidance.
El-Erian, who is the chief economic adviser at Allianz, has repeatedly criticized the US central bank for reacting too late to an inflation surge that started in 2021, and then unleashing a series of sharp interest rate hikes last year as consumer prices surged the most in four decades.
His tweet was in response to a Reuters article about how the Fed’s steadfast pursuit to control inflation by aggressively rising interest rates risks an economic downturn for the US economy.
He pointed to commentary from Raghuram Rajan, former Indian central bank governor and University of Chicago’s Booth finance professor, who told Reuters that the Fed is “a little bit in a situation where they’re damned if they do, and damned if they don’t.”
That’s because “If they do raise short-term policy rates, clearly, at some point, something more breaks,” Rajan said, adding that he thinks there is a slim chance the Fed will be able to maneuver a soft-landing. That’s a scenario when economic growth slows but avoids a recession.
“This is an illustration of what happens when policymakers fall so far behind in responding to a major challenge(s),” El-Erian tweeted, reiterating that the discord between Fed signals and investors’ interest-rate expectations can cause turbulence in the market.
The Fed raised interest rates for the 10th time in a row this month – from near-zero last March to upward of 5% in May. While inflation cooled to 4.9% in April from last summer’s peak of 9.1%, it still remains way above the Fed’s 2% target.
El-Erian has previously said that under the leadership of chairman Jerome Powell, the US central bank risks being remembered “as the Fed that undermined its own credibility, its political autonomy, and America’s crucial anchoring role at the center of the global economy.”
In March, El-Erian said he thinks there’s no “first best policy response” the Fed can take any more, as “everything would have collateral damage and unintended consequences.”