Jason Reed/Reuters
- Economist Mohamed El-Erian said the Federal Reserve needs skill, time, and luck to nail a “soft landing”.
- He said the central bank was too slow to tackle inflation but had now been “humbled” and understood the issue.
- El-Erian warned of recession after Fed Chair Powell touted half-point rate hikes to tame inflation.
Economist Mohamed El-Erian said the Federal Reserve’s big steps to tame inflation may be too late and could risk a recession in the US.
Speaking to CNBC’s “Closing Bell” on Thursday after Fed Chair Jerome Powell signalled a 50-basis point interest rate hike in May, El-Erian said, “This is a massive move in the Fed, but it is one that is late relative to developments on the ground and relative to where the market has been.”
He said the market had been guiding the Fed and it had been too slow to recognize and deal with inflation, with a recession risk now looming.
“They’re going to need three things: skill, time, and luck to get to a soft landing,” El-Erian said, expressing concern about the lack of time the Fed had in controlling inflation due to their delayed response.
A soft landing is the Fed being able to control inflation without plunging the country into a recession. El-Erian and other economists have expressed concern over the Fed’s ability to carry this off and doubt its ability to effectively deal with inflation at 40-year highs. Some economists forecast a recession before the end of the year, as they see the Fed slowing the economy so much it starts to shrink.
“History suggests when the Fed is this late, the probability of a recession is uncomfortably high,” El-Erian said. Economists at investment banks like Morgan Stanley have also expressed doubt over the Fed’s the ability to engineer a soft landing.
The Russia-Ukraine conflict has added to price pressures that were already surging as economic activity returned to a more normal footing after the pandemic. The cost of food and energy has soared this year, putting consumers under pressure.
In March, the Fed raised interest rates for the first time since 2018 by 25 basis points. Hawkish comments from Powell and other Fed officials have set expectations for at least six more rate hikes in 2022.
Investors now largely expect the Fed to raise rates by 50 basis points at its May, June, and July policy meetings, which would place the benchmark rate at roughly 2% by the end of July. Markets are generally pricing in a 2.5% rate by the end of 2022.
St. Louis regional Fed President official James Bullard said he wouldn’t rule out a 75 basis point hike from the US central bank this year, because inflation is “far too high.”
El-Erian said the Fed had finally understood the severity of inflation and was acting on it now.
“I think they’ve got it or they understand much better and they’ve been humbled.”
El-Erian, who is chief economist for German asset manager Allianz, which owns PIMCO, said investors in the stock market would be wise to take profit now, before equities come under further pressure.
“Be careful, if you’re heavily invested this is the time to take some chips off the table, we are adjusting liquidity paradigms, and be careful of volatility,” he said.
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