The Fed is losing credibility over its inflation narrative, says Mohamed El-Erian

Mohamed El-Erian, Chief Financial Officer for Allianz SE, listens during a Bloomberg Television interview on the sidelines of the Bloomberg New Economy Forum in Singapore, Tuesday, November 6, 2018.

Wei Leng Tay | Bloomberg | Getty pictures

The Federal Reserve is losing credibility over its long-standing view that inflation is temporary, according to Allianz Chief Economic Advisor Mohamed El-Erian.

“I think the Fed is losing credibility,”[ads1]; El-Erian said Monday. “I have argued that it is very important to restore a credible voice on inflation, and this has massive institutional, political and social implications.”

He spoke to CNBC’s Dan Murphy at the ADIPEC Energy Industry Forum in Abi Dhabi, United Arab Emirates.

El-Erian claims that the Fed’s inflationary stance weakened the central bank’s forward guidance and undermined President Joe Biden’s economic agenda. He said that people should not forget that those with low incomes are hardest hit by rising consumer prices.

“So, that’s a big problem, and I hope the Fed will catch up on developments on the ground,” he added.

A Federal Reserve spokesman was not immediately available for comment when contacted by CNBC.

Fed leader Jerome Powell has previously said he expects inflation to continue “well into next year” and admitted that it is “frustrating” that supply chain problems are showing no signs of improving. However, the Fed has largely maintained its reports that rising inflation is largely linked to the coronavirus pandemic, and these supply chain problems will pass.

The consumer price index, which covers products ranging from petrol and health care to groceries and rent, rose 0.9% on a monthly basis in October, the Ministry of Labor reported on 10 November, significantly higher than expected. The survey climbed to 6.2% year-on-year, reaching its highest point since December 1990.

“It is not temporary”

“We are in this transition of central banks mischaracterizing inflation. The repeated narrative: ‘It is transient, it is transient, it is transient.’ It is not temporary, “said El-Erian, warning that the Fed was at risk of making a major political mistake.

“We have plenty of evidence that there are behavioral changes going on,” El-Erian said. “Companies charge higher prices [and] there will be more. Power outages last much longer than some expected. Consumers promote purchases to avoid problems on the road – this of course puts pressure on inflation. And then wage behavior changes. “

“So, if you look at the underlying behavioral element that leads to inflation, you come to the conclusion that this will take a while. And that’s even before you talk about the renewed Covid disruptions,” he added.

El-Erian cited the reintroduction of public health restrictions and the closure of ports in major manufacturing countries, such as China and Vietnam, as examples of renewed supply chain disruptions.

Asked what the most appropriate response from the Fed would be, El-Erian said: “To accelerate the pace of downsizing in December.”

The Fed said Nov. 3 that it would begin slowing down its monthly bond purchases “later this month.” The process will see reductions of $ 15 billion each month – $ 10 billion in government bonds and $ 5 billion in mortgage-backed securities – from the current $ 120 billion a month that the Fed buys.

“And secondly, start doing what the Bank of England is doing … which is to start preparing people for higher interest rates,” El-Erian said, citing similar steps taken by central banks from Australia, New Zealand and Norway, among others. many others.

– CNBC’s Jeff Cox contributed to this report.

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