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Chief economist Mohamed El-Erian said the Federal Reserve made two big mistakes that he believes will go down in history.
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“I fear we risk a very high probability of suffering a damaging recession that was entirely avoidable,” he said Sunday.
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The Federal Reserve has been rapidly raising interest rates in an attempt to cool inflation, which has reached its highest level in 40 years.
Chief economist Mohamed El-Erian said the Federal Reserve “made two big mistakes that I think will go down in the history books” and cause a “damaging” recession.
Speaking on CBS’ “Face the Nation” on Sunday, El-Erian told host Major Garrett: “I’m afraid we risk a very high probability of suffering a damaging recession that was totally avoidable.”
Allianz’s top economic advisor pointed out two mistakes made by the Federal Reserve. He said the Federal Reserve’s first mistake was mischaracterizing inflation as transitory. “By that they meant it’s temporary, it’s reversible, don’t worry,” he said.
The second mistake was when the Federal Reserve finally acknowledged that inflation was persistent and high, but “failed to act meaningfully,” he added.
Using a driving analogy, El-Erian said the Fed’s failure to take its foot off the accelerator last year means they have had to slam on the brakes this year “which would lead us into recession.”
“So yes, unfortunately, this will result in a big policy mistake on the part of the Federal Reserve,” he said. “Even (Federal Reserve) Chairman Powell has gone from seeking a soft landing to a softer landing to now talking about pain. And that’s the problem. That’s the cost of a Fed falling behind. No It only has to overcome inflation, but it has to regain its credibility,” he said.
Earlier this month, El-Erian advised investors to end their “love story” with a Fed turnaround in which the central bank reversed course on its aggressive monetary tightening.
The Federal Reserve has been rapidly raising interest rates in an attempt to cool the 40-year high inflation in the U.S. economy.
The September inflation report will be published on Thursday. The Federal Reserve is expected to raise rates for the sixth time at its Nov. 1-2 meeting to boost the federal funds rate from the current range of 3% to 3.25%. In its last three meetings, the Federal Reserve increased the reference rate by 75 basis points.
Changes in the federal funds rate (the interest banks charge each other to borrow money overnight) influence interest rates on loans, credit cards, and bank accounts. When mortgage rates rise, potential home buyers may be priced out of the market due to lack of affordability.
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