Taps Coogan – September 10th, 2021

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Conventional wisdom holds that the Fed is going to start tapering its QE program sometime by the end of the year. However, according to Allianz chief economic advisor, Mohamed El-Erian, by the time winter rolls around the economy may be too weak to support that tapering, despite persistently high inflation.

 

Some excerpts from Mohamed El-Erian’s interview with CNBC:

“This (inflation) is no longer just about supply chains, as disrupted as they are. This is about transportation, containers, about port congestion…, and it’s about persistent labor market shortages…”

“The Fed still believes (inflation) is transitory and unless it extends transitory to include two years, this is not going to prove transitory. My expectation is that the window to taper is closing. They should have done it. They have not done it. Now, they have a weak jobs report. I think the market is absolutely right that we are not likely to get an announcement until December, which means we are not going to start tapering until next year at the earliest, and yet yields are edging higher…” 

The Fed never sees the risks of being too dovish, only the risks of tightening. As a result, they have waited out some of the quickest economy recovery on record without any attempt at policy normalization despite high inflation.

Now, the plan is to start to tighten well after the knee-jerk recovery will likely be over this winter. No doubt they’ll give up on that tightening plan at the first sign of resistance and blame the fallout on ‘persistent deflationary pressures’ instead of poorly timed policy decisions.