Taps Coogan – April 28th, 2021

Enjoy The Sounding Line? Click here to subscribe.

 Mohamed El-Erian, Allianz chief economic advisor, recently spoke with CNBC to warn that he would rather see the Fed “tap the brakes” now than be forced to play catchup with inflation later.

 

Mr. El-Erian noted about today’s Fed meeting:

“I think (the Fed) is going to ignore the inflationary pressure building up. It’s going to ignore the pockets of market excesses and simply try to keep things as is. They want an uneventful… meeting and I suspect that they’ll get it. And then we all turn our attention to June and the question is ‘What if the Fed falls behind?’ and one of the problems with this outcome based approach that the Fed is taking is that the risk of falling behind is high, and then you have to slam on the breaks, and that’s the one thing that could really disrupt the markets. So, I would rather see them tap the brakes now than have a very high risk of them slamming on the breaks down the road.”

“I am really worried that what they hope is transitory inflation ends up being persistent inflation and if we end up in a persistent inflation world they are going to have to slam on the brakes…”

The irony of the Fed concluding that it somehow tightened too quickly after the Global Crisis and vowing to not repeat the mistake this time is that CPI was running at over 2% for over a year from 2011 into 2012 while the Fed kept overnight rates at zero and ran QE3. The Fed went on to keep rates at zero until 2015 and didn’t stop QE3 until late 2014, but inflation, as measured by the Fed, fell anyways.

Excessive stimulus may be simulative in the short term but it is definitely deflationary in the long term. Just ask Japan. The longer the Fed does excessively simulative policy, the quicker deflation will set in once they try to normalize. 

If you wanted to create a boom-bust economy, this is how you’d do it. 

Would you like to be notified when we publish a new article on The Sounding Line? Click here to subscribe for free.