Mohamed El-Erian Warns Fed’s Rate Hikes Could Tank Economy, Job Market

  • Mohamed El-Erian warned of slower global growth, stubborn inflation and higher unemployment.
  • The top economist pointed to signs of weaker demand and the likelihood of more rate hikes by the Fed.
  • El-Erian said the energy crisis in Europe and lockdowns in China increase the risk of stagflation.

Mohamed El-Erian has raised the prospect of a global economic catastrophe in the form of slowing growth, stubbornly high inflation and rising unemployment.

“Lower US growth and a late #Fed forced to hike 75 basis points for the third straight day is consistent with global stagflation tendencies,” he said tweeted on Saturday. “Wouldn’t surprise me to see more growth revisions.”

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Allianz’s chief economic adviser referred to Goldman Sachs lowering its US GDP growth forecast for 2023 to 1.1% from 1.5% last week. The investment bank forecast that the Federal Reserve will roughly double its benchmark interest rate to between 4% and 4.25% by the end of this year.

“Stagflation” describes a toxic combination of stagnant economic growth, elevated inflation and rising unemployment. In El-Erian’s view, the Fed’s aggressive rate hikes risk stifling growth and driving up unemployment without dampening inflation.

The former CEO and co-principal investor at PIMCO pointed to the risk of stagflation on a Friday tweetafter the Financial Times reported that business bankruptcies in England and Wales rose 43% yoy in August.

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“Unfortunately, troubling news like this is likely to increase in the coming months as some companies struggle to navigate the mix of high costs and falling demand – the twin punches of #stagflation,” he said.

In early September, El-Erian warned that global growth had become more vulnerable due to the energy crisis in Europe, ongoing lockdowns in China and high inflation and slowing demand in the US. As a result, central banks are at greater risk of inadvertently plunging their economies into recession, he argued.

“Needless to say, this is not a good environment for central banks to catch up,” he said. “The risk of another policy mistake, already uncomfortably high, is increasing.”

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Other market commentators have cast a gloomy outlook over the past few days. Nouriel Roubini, an economist nicknamed “Dr. Doom,” said the Fed would need to double interest rates to about 5% to beat inflation — while curbing growth, asset prices and the job market.

“I worry about a stagflationary debt crisis because you have the worst supply shocks of the ’70s and the worst global financial crisis from too much debt, and that combination is dangerous,” Roubini said.

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