Mohamed El-Erian has spent the last two years criticizing the Federal Reserve for a series of missteps that have left the US economy in a no-win scenario.
The economist says that by downplaying inflation as “temporary” and keeping interest rates near zero even after the economy recovers from the pandemic, the Fed has allowed price hikes to take hold.
This has put Fed Chair Jerome Powell in a “damned if you do and damned if you don’t” situation, argued El-Erian, the president of Queens’ College at Cambridge University and chief economic adviser to the Alliance is, in a CNN op-ed on Wednesday.
The Fed can either keep raising interest rates to fight inflation even as the economy slows, increasing the likelihood of an outright recession. Or it may choose to ease its fight against inflation in hopes of avoiding a recession, making consumers more likely to be stuck with higher prices for the foreseeable future.
In both scenarios, El-Erian argues that there will be “significant collateral damage and unintended adverse consequences” to the public.
And he’s not the only Wall Street veteran to claim the Fed is catching up after it made mistakes last year.
“The Fed recognized inflation too late, started raising interest rates too late and started unwinding bond purchases too late. Since then they have been playing catch-up. And they’re not done yet,” said Greg McBride, Bankrate’s chief financial analyst wealth.
All of this means that the likelihood of the US economy avoiding a recession is rapidly falling, El-Erian said.
“Unfortunately, the likelihood of a ‘soft landing’ – that is, bringing down inflation without much damage to growth – has become uncomfortably small,” he said Wealth.
Morning Consult chief economist John Leer backed El-Erian’s argument, noting that Fed officials this week “significantly raised” their forecasts for inflation and unemployment for the next two years while lowering their forecasts for economic growth.
“Even the Fed is less confident it can pull off a soft landing,” he said Wealth.
A global growth slowdown
El-Erian’s argument for why the US economy is unlikely to achieve a soft landing is based not only on the Fed’s need to aggressively raise interest rates to fight inflation, but also on the notion that the entire global economy is experiencing a slowdown learns.
He points out that all three of the world’s largest economies are struggling and developing countries like Sri Lanka and Argentina are experiencing unsustainable inflation rates.
“Among the three most systemically important economies, Europe faces almost certain recession, China is growing well below historical averages and the US risks being plunged into recession by a late Federal Reserve. This will likely add oil to the small fires already blazing in some developing countries,” El-Erian said wealth.
In his opinion, Europe’s energy crisis has worsened in recent weeks, prompting Deutsche Bank to argue that the bloc is now headed for a severe recession.
At the same time, investment banks have repeatedly lowered their forecasts for China’s economic growth as the country grapples with a housing crisis, while its zero-COVID policy continues to shut down factories and hamper consumer spending.
Additionally, China faced a record heatwave over the summer and is still grappling with a drought that has paralyzed its supply chains.
However, growth is not only declining in China and Europe. Economists at major institutions such as the World Bank and Bank of America have significantly lowered their forecasts for global economic growth in recent months.
And declining growth in all major economies, combined with rising central bank interest rates, is a recipe for disaster, according to El-Erian.
The economist’s comments echo statements made by World Bank Vice President Ayhan Kose earlier this week after the organization released a new study on the rising potential for a global recession.
Kose argued that the impacts could “reinforce each other” as central banks around the world raise interest rates at the same time. This means that a “global growth slowdown” is all but guaranteed and a “global recession” is a growing possibility.
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