El-Erian says ‘transitory’ was the ‘worst inflation name within the historical past’ of the Fed


Calling inflation “temporary” is a historically poor move for the Federal Reserve, said Mohamed El-Erian, Allianz’s chief economic advisor.

“Characterizing inflation as transitory is likely the worst inflation call in Federal Reserve history and is likely to lead to a political mistake,” the former Pimco CEO and current president of Queens ‘College said on CBS’ “Introduce yourself” on Sunday the nation. “

“So the Fed needs to quickly regain control of the inflation narrative and regain its own credibility starting this week,” he added. “Otherwise it will become a driver of higher self-feeding inflation expectations.”

Mohamed El-Erian

Olivia Michael | CNBC

El-Erian’s comments came shortly after the Labor Department reported that the consumer price index, a broad measure of inflation, rose 6.8% yoy in November.

Though the number was only marginally above Wall Street’s expectations, it was still the largest twelve-month move since 1982, when the US struggled with the worst inflation ever. Even excluding food and energy prices, the CPI rose 4.9%, the largest increase in about 30 years.

Fed officials have long said they expected the rise in inflation to be “temporary” as it will be driven by supply chain and demand factors largely related to the pandemic. However, Fed Chairman Jerome Powell recently said it was time to take the floor as it tends to create confusion among the general public.

El-Erian said the Fed’s understanding that price pressures are not going away is essential to making the right policy decisions.

“If you catch up now, if you honestly say your mistake and take steps now, you can still take control,” he said.

Changes are coming

The Federal Reserve’s Open Market Committee, which sets interest rates for the central bank, meets this week, expecting it to continue to step on the brakes on its ultra-loose monetary policy. An important step is the likely decision to increase the pace of monthly bond purchases, which should support the economy and keep interest rates low.

However, the markets assume that rate hikes are still months away and will at least not be implemented until bond purchases come to a complete standstill, likely in March.

El-Erian told CBS that it was important for the Fed to “take its foot off the accelerator” rather than quickly tighten policy.

However, in a CNBC interview Monday, he encouraged the Fed to accelerate the reduction in bond purchases, which the market expects to double from the current interest rate of $ 15 billion per month.

“If I were you, I would do three things that you won’t,” he said during a Squawk Box interview. “I would 1) be very open and honest about why I misunderstood the inflation call and try to recapture the inflation narrative. 2) I would go further than double the rate of taper, and 3) I would open it up to the possibility that rate hikes are coming faster than the market has.

According to CME’s FedWatch, the markets are anticipating a first rate hike of a quarter percentage point in May 2022 with a probability of around 58%, followed by up to two more before the end of the year.

For their part, Fed officials will release their latest projections on interest rates, unemployment and GDP growth after the session closes on Wednesday. The projections are expected to be more aligned with market expectations, although policymakers are likely to emphasize the flexibility that depends on the data.