Taps Coogan – November 18th, 2021

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Mohamed El-Erian, Allianz chief economic advisor, has been warning all year that the Fed needed to slow the pace of accommodation or end up needing to play catchup down the road, potentially causing a recession.

Escalating that concern, in a recent interview with Bloomberg and article in the Financial Times, Mr. El-Erian declares that the Fed has made its worst inflation call in decades, that it is missing its window to avoid a policy mistake causing “widespread” damage, and that it needs to accelerate the planned pace of tapering in December.

Some excerpts from El-Erian:

“They didn’t declare humility at the beginning of the process… There are lots of structural changes going on in the post-pandemic economy… You can’t simply dismiss them as transitory… They just didn’t have the open mindset to see that so they got stuck on this narrative and they held on to it for too long and the result of which is they are looking at inflation that is much higher than they ever expected… and they are looking at inflation that will last even longer than they expect even now. This is going to go down in history as one of the worst inflation calls by the Federal Reserve. 

“(The window to act) was wide open when you and I started talking about this in March or April. The economy was doing extremely well. That was the time they should have started tapering. Now they are going to start tapering and the concern is that the time between ending the taper and interest rates hikes is not going to be significant… and in addition they are going to have to raise rates much faster than they would have otherwise… That’s a policy mistake… I hope it doesn’t happen. There’s still a window to avoid it and it would start in December by the Fed accelerating its taper program…”

While Mr. El-Erian is spot on, and has been all year, the likelihood that the Fed will accelerate its taper program in December is as close to zero as these things get. So is the likelihood of them rushing into rate hikes next year.

This Fed has made it clear that they prefer high inflation to the pain of doing the right thing. With all but one of the ‘hawkish’ members of the FOMC (less dovish to be accurate) retiring or being forced out this winter, any changes that the Fed does make next year are likely to make matters worse. Indeed, given the likely composition of the Fed next year, a Fed with only one slightly hawkish member, and as many as four presumably ultra-accomodative, woke, MMT type doves coming in, the ‘crazy’ hasn’t even started. 

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