Photo: Economist Mohamed El-Erian, president of Queens' College, University of Cambridge, and chief economic adviser at PIMCO parent Allianz, speaks in New York, Oct. 25, 2010. (AP Photo/Kathy Willens)
The U.S. Federal Reserve is flip-flopping on its monetary policy as it tries to contain inflation amid surging consumer demand and the looming threat of global stagflation caused by the war in Ukraine, according to economist Mohamed El-Erian.
Rising energy and commodities prices caused by the destabilization of NATO ally Ukraine have analysts talking of a return to 1970s-style stagflation, in which inflation rises as the economy stagnates or goes into recession.
The war in Ukraine is already causing a spike in inflation globally due to a slowdown in global supply chains, causing a rise in prices from goods in the supermarket to fuel at the gas pump.
In the U.S., the Feds were initially dismissive of inflation, expecting consumer demand to eventually die down and inflation to stay within a set framework. After inflation rose more than expected, the Fed became hawkish and started inching up interest rates.
The Fed has lost credibility when it comes to inflation, El-Erian said during a Bloomberg Television interview. An Egyptian American, El-Erian is president of Queens’ College, Cambridge, and chief economic adviser at Allianz, the corporate parent of PIMCO, where he served as CEO and co-chief investment officer.
“They have been flipflopping all over the place,” El-Erian said in a March 22 interview. “They are now coming across as incredibly hawkish. A few weeks ago, they were coming across as incredibly dovish. So, I don’t really know where they are. It seems like a rollercoaster right now.”
Inflation jumped to 7.9 percent in February — and that was before the Biden administration’s sanctions on Russia helped push energy prices higher. March inflation could be worse than the Fed hopes and force it to push interest rates higher.
The U.S. central bank decided earlier in March to increase interest rates for the first time in more than three years. Markets expect the Fed to get even more aggressive.
“The Feb is increasingly being forced to consider what is the least bad policy mistake it wishes to be remembered for: meeting inflation target by causing a recession, or allowing high and potentially destabilizing inflation to persist well into 2023,” El-Erian said.
El-Erian urged policymakers to develop recovery plans to counter the longer-term and widespread economic impact of the Russian war in Ukraine.
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“We’re going to see a global stagflation… we’re going to see depression in Russia and Ukraine, we’re going to see recession in Europe, we’re going to see stagflation in the US and we’re going to see a number of commodity-importing emerging economies running into debt problems,” El-Erian predicted.
“The stagflationary winds have become much much stronger because of what’s happening in Ukraine and Russia,” El-Erian continued. ” … it is another great unequalizer so we do have concerns for the most vulnerable members of our society …”
Photo: Economist Mohamed El-Erian, president of Queens’ College, University of Cambridge, and chief economic adviser at PIMCO parent Allianz, speaks in New York, Oct. 25, 2010. (AP Photo/Kathy Willens)
