Economist Mohamed El-Erian, chief economic adviser to Allianz and chairman of Gramercy Funds Management, has warned that the US Federal Reserve cannot meet its 2% inflation target without weakening the US economy. “You need a higher stable inflation rate. Call it 3% to 4%,” the economist suggested.
The Fed could destroy the US economy, the economist warns
Economist Mohamed El-Erian warned on Friday that the Federal Reserve could not meet its 2% inflation target without “crushing the economy.” El-Erian is President of Queens’ College, Cambridge University and Chairman of Gramercy Funds Management. He is also Chief Economic Adviser at Allianz, the parent company of PIMCO, one of the largest investment managers.
“You need a higher stable inflation rate. Call it 3% to 4%,” the economist pointed out in an interview with Bloomberg Television. He emphasized:
I don’t think they can get the CPI to 2% without wrecking the economy, but that’s because 2% isn’t the right target.
El-Erian’s comments followed the government’s Consumer Price Index (CPI) data released on Tuesday. On a monthly basis, prices rose 0.5% in January, the most since October. On an annual basis, consumer prices increased by 6.4% in January compared to 6.5% in December. Following the CPI report, several Fed officials said the Federal Reserve may need to raise interest rates above initial expectations to dampen ongoing price pressures.
The Allianz economic adviser explained that there are several factors that require a higher target inflation rate. These include supply-side developments, including an energy transition, changing supply chains during the pandemic, a tight labor market and shifting geopolitical issues.
El-Erian said the Federal Reserve is “too data dependent.” Noting that “it’s right to consider data, but you have to have a view of where you’re going,” he warned that the problem now is that the Fed is stuck to an elusive 2% target to pursue. In January, El-Erian forecast that inflation could “stick” around the 4% range.
The economist previously warned that the Federal Reserve could lose credibility if it changes its inflation target. He mean:
You can’t change an inflation target if you’re so far off target.
Do you agree with the economist that the Fed cannot meet its 2% inflation target without weakening the US economy? Let us know in the comment section below.
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