Taps Coogan – December 10th, 2021

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Mohamed El-Erian, Allianz chief economic advisor, recently spoke with CNBC to explain why the flattening yield curve, particularly at the long end, is signaling a Fed policy mistake that may eventually lead to a recession.

 

El-Erian on why the yield curve is flattening:

“I would encourage you everyday to look at the yield curve… and that is starting to signal more concern about a policy mistake, which is the Fed not going fast enough in the beginning and then having to overdue it later on. So, that’s why you are seeing these curves flatten.”

“Inflation has become the major threat to market. (The) Fed has simply under-estimated the inflation threat. It has stuck to the transitory call for too long and now it is exiting that call but is doing it late and is doing it in the face of two other developments, a new Covid variant and what’s happening in China. That’s why the market is starting to sense that we’re going to have a policy mistake that will add in the short term to the stagflationary winds, and in the long term may well cause the risk of a recession.”

“I want to stress that we are not going back to the 1970s, but we’re going to something that neither the markets nor the economy are wired for, which is inflation that persists above 4% for a while… What tends to happen in a typical cycle is you have an initial dislocation, commodities being one, it could be something else…, that is not taken seriously and then starts changing behaviors…”

That sounds about right. 

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