Federal Reserve losing credibility over long inflation period, says Mohamed El-Erian

Federal Reserve losing credibility over long inflation period, says Mohamed El-Erian

Highlights:

  • “I’ve argued that reestablishing a credible voice on inflation is extremely important, and this has massive institutional, political, and social implications,” El-Erian said Monday.
  • Fed Chair Jerome Powell has previously stated that he expects inflation to linger “far into next year” and that the lack of progress in supply chain difficulties is “frustrating.”

Federal Reserve losing Credibility?

According to Mohamed El-Erian, senior economic counsellor at Allianz, the Federal Reserve is losing credibility because of its long-held belief that inflation is temporary.

El-Erian said Monday, “I believe the Fed is losing credibility.” He emphasised that the re-establishment of a credible voice on inflation is critical. He went on to say that this has enormous institutional, political, and societal ramifications.

El-Erian said that the Fed’s inflation stance undercut President Joe Biden’s economic plan by weakening the central bank’s forward guidance. People should remember, he continued, that individuals with low incomes are the ones who are severely hurt by rising consumer prices.

“It’s a huge issue,” he added, “and I’m hoping the Fed will keep up with events on the ground.”

When reporters phoned the Federal Reserve, a representative was unavailable to comment right away.

The consumer price index, which includes items such as fuel and health care, as well as groceries and rents, climbed 0.9 percent monthly in October, well-exceeding expectations. The rate of increase was 6.2 percent year over year, the highest since December 1990.

Inflation is not Temporary

“We’re at a period where central banks are mischaracterizing inflation. ‘It is transitory, it is fleeting, it is transitory,’ goes the refrain. El-Erian warned that the Fed was on the verge of committing a big policy blunder.

El-Erian stated, “We have ample evidence that behavioral changes are going on.” “Companies are raising prices, and there will be more to come.” Supply interruptions are lasting far longer than anyone expected. Consumers are deferring purchases to prevent troubles in the future, which puts upward pressure on inflation. Then there’s a shift in behavior.”

“So, if you look at the underlying behavioral factor that leads to inflation, you conclude that this is going to endure a long time.” “And that’s before you even consider the new Covid outages,” he continued.

“To accelerate the pace of tapering in December,” El-Erian replied when asked what the best reaction from the Fed would be.

Leave a Reply

Your email address will not be published. Required fields are marked *