Taps Coogan – June 24th, 2022

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Mohamed El-Erian, Allianz Chief Economic Advisor, recently spoke with CNBC to warn that he sees the Fed facing two bad choices: persisting with inflation for too long or tightening too quickly and pushing the economy into a recession.

What does he think that the Fed will choose? Both, flip-flopping from tightening too quickly and then flip-flopping to easing.

 

Some excerpts from Mr. El-Erian:

“The Fed has no choice but to confront inflation. In doing so, and because it’s late, yes, it has increased the probability of a recession. But…, the original sin was committed last year and once you start from such a suboptimal position, you end up with this dilemma that the Fed has right now and you are going to end up making one of two policy mistakes: either push the economy into recession with a high likelihood or alternatively persist with high inflation for too long.”

“I believe that they are going to flip-flop, which is the worst of all three possibilities. Right now they are focused on inflation. When the growth consequences become clear, they are going to ease their foot off of the brakes, and then they are going to have to slam on the brakes again and that is my fear… Something that we used to witness in the old days of central banks…”

“(Powell) is late. He is very late. He should have started last year easing his foot off of the stimulus accelerator. He didn’t… The week in March when the US printed a seven-handle on CPI (7.0-7.9%), the Fed was still injecting liquidity into this economy. Just think about that… Therefore, the collateral damage is going to be significant.”

I couldn’t agree more. There is more to the interview, so enjoy it above. 

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