- Mohamed El-Erian said that the Fed’s rate hike has led to sell-offs, which shows its credibility is waning.
- According to economists, this increases the likelihood of economic pain as tightening continues.
- He said that the markets expect the Fed “to cause more collateral damage” in an effort to achieve its inflation target.
Mohamed El-Erian says that the Federal Reserve has lost most or all of its credibility, putting the US at serious economic risk.
On Wednesday, the economist said that because of the Fed’s inability to control inflation this year, markets are no longer certain that a US recession can be avoided by tightening monetary policy.
El-Erian stated in a statement that “Markets see the central bank that expects more collateral damage while it tries to achieve its inflation target.” Project Syndicate op-ed. “Jerome Powell made the same statement this month as he did when he tried to avoid any soft or’softish landing’, as he used to say.
As it fights for inflation control, the Fed announced last week its third consecutive 75 basis point increase in interest rates.
Powell, the head of the central banks, also warned against the “fight against” Americans will feel “some pain” if prices rise.Slowing job growth, making mortgages more expensive and increasing the cost of credit cards.
Stocks have fallen since his speech. S&P 500The past seven days have seen a drop of 3.8%
Also, the spread between yields on US Treasury Notes of 2-year and 10-year durations has continued to increase. Investors expect a recession, which tends signal to be a sign that the market is in decline.
El-Erian stated, “Powell has signaled more pain ahead, implying an unbearably high probability for recession.” The market seems to be in agreement with this outlook. The yield curve has been inverted with the yield on 10-year Treasury Bonds falling to 40 basis points lower than that on 2-year bonds.
El-Erian says that while the Fed raises interest rates aggressively to contain soaring prices in an attempt to calm them, El-Erian believes the Fed initially lost credibility with the markets due it fueling the “”All things bubble” of 2021 by keeping interest rates low even as inflation prints started to steadily climb.
He said that the US needed more monetary-policy tightening to make up for its inability to respond quickly and credibly to Fed actions. “That will indeed lead to ‘pain’ in form of foregone growth, actual and potential, and higher unemployment which will be devastating for the most vulnerable members of society.”
