Economist Mohamed El-Erian: Federal Reserve Is Pinning Itself In Corner On Inflation

Economist Mohamed El-Erian: Federal Reserve Is Pinning Itself In Corner On Inflation

El-Erian

PIMCO CEO and Co-Chief Investment Officer Mohamed El-Erian speaks at the Buttonwood Gathering on Fixing Finance in New York, Oct. 25, 2010. (AP Photo/Kathy Willens)

The U.S. Federal Reserve is pinning itself in a corner when it comes to the inflation-watching stance it has adopted as consumer spending picks up, the economy reopens and mass vaccinations ease fears over the coronavirus pandemic, says economist Mohamed El-Erian.

The Fed has refrained from hiking interest rates despite inflation projected to exceed the 2 percent target it set for the economy, saying it will let price growth run hotter than usual in hopes of driving a stronger recovery and tighter labor market.

The Fed’s last set of quarterly economic projections places its first interest-rate hike sometime after 2023.

“The Fed is pinning itself in a corner by insisting that this is transitory,” El-Erian, president of Queens’ College, University of Cambridge, said during an interview with CNBC’s Squawk Box. “All evidence suggest that you should have an open mind.”

In a February article published by Bloomberg, El-Erian said it made more sense for the Fed “to shift from a forecast-based approach to an outcome-based one” and the policymakers’ fence-sitting approach was “a possible policy mistake in the making,” he said.

“The Fed should do all it can now to ensure that both its inflation and employment objectives are met as soon as possible,” El-Erian wrote. “And should it end up with too loose a policy stance, it would be able to regain control by tapping the monetary brakes then.”

Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?

El-Erian repeated the same sentiments in another article published by the Financial Review in early March.

Most economists are worried about the U.S. inflation being persistent, while companies including billionaire Warren Buffet’s Berkshire Hathaway say serious levels of inflation are starting to take hold as the U.S. economy.

“When markets see the price levels go up by more than what the Fed is expecting, they will worry and already you have seen bond yields on longer-dated securities go up, so there is concern and you’re starting to see it in the marketplace,” El-Erian told CNN.