Taps Coogan – February 18th, 2022

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After spending nearly all of 2021 warning the Fed that inflation was not transitory and that they needed to taper QE sooner and faster, Mohamed El-Erian, Allianz Chief Economic Advisor, recently spoke with CNBC to warn that the Fed missed “all the windows” for perfect policy solutions and that slamming on the brakes will be worse than sticking to a more gradual approach to tightening.

 

Some excerpts from Mohamed El-Erian: 

“If (the Fed) were to look at 2s10s (the 2-year 20-year yield curve spread), that was under 40 basis points earlier this morning… Massive flattening. If they were to look at 7s10s, it’s nearly inverted. If the Fed were to take a holistic view of what’s happening in fixed income, they would be worried that the market is pricing in a policy mistake. The market is pricing in a Fed that is too slow and then somehow ends up derailing the economic recovery.”

“So what should the Fed do? It’s very difficult for me to say that… because the choices aren’t particularly attractive. They’ve gotten themselves into this hole. Should they be bold to try to regain the inflation narrative and the policy narrative and risk to derailing the economy and really undermine markets or should they go slowly… and find themselves in the trap of developing countries where you are chasing the market narrative all the time and you never catch up…? If it were me I would ask for slower rather than bold, but I would recognize that I am way far away from the world of ‘First-Best.'”

“… We have to recognize that having missed all the windows that were open to it, the Fed now doesn’t have a first-best policy… It’s incredible for me to hear people that were in ‘camp transitory’ five months ago calling for the Fed to go seven times this year… some are even saying do an emergency hike… I worry whether the economy can absorb all this. This is an economy that has been conditioned and markets that have been conditioned to function with very low interest rates and incredibly loose financial conditions.” 

Sounds about right.