El-Erian Says US Recession Not a ‘Done Deal’ in Fed Fight By Bloomberg

&copy Bloomberg. Mohamed Aly El-Erian (chief economic advisor for Allianz SE) reacts to a Bloomberg Television interview. Interview was conducted on the sidelines during the Ambrosetti Forum Cernobbio, Italy on Friday, Sept. 6, 2019. The 45th annual forum is entitled

(Bloomberg) — A US recession is not a “done deal” thanks to a relatively resilient labor and credit market, while Wall Street has already priced in a high degree of interest-rate risk, according to Mohamed El-Erian, chief economic adviser at Allianz (ETR:) SE.

El-Erian believes that the Federal Reserve faces a greater challenge than Paul Volcker’s days, but that the central bank could still avoid an economic downturn by implementing its inflation-fighting campaign. The policy challenge is enormous.

“The risk of a US recession is uncomfortably high. I don’t think it’s a done deal. I don’t think it’s 100%,” the Gramercy Funds chairman told Bloomberg Television’s The Open on Tuesday. “The Fed can hopefully still find a way around this.” 

Volcker is often credited with bringing down inflation in the 1980s by increasing interest rates to 20%. Chair Jerome Powell, this time around, has to consider disruptions to the financial system as the Fed attempts to “borrow credibility” from the Volcker-led Fed to justify not being as aggressive with policy decisions, said El-Erian, who is also president of Queens College, Cambridge and a Bloomberg Opinion columnist.

“The problem that he has that Volcker did not have is a tri-lemma. Volcker dealt with inflation and growth. Chair Powell has on top of that financial stability,” he said. If the Fed pivots away from its current hawkish policy, “it will be because of financial stability. It’s not going to be because they’ve decided to not look at inflation anymore.”

“The risk here is that we get a quagmire of stagflation as we try and lower the financial stability risk,” El-Erian said. “That is what happens when you’re late — you have fewer degrees of freedom.”

El-Erian pointed out earlier in the week that the Fed’s rapid hikes in interest rates could cause financial and economic damage. Investors are betting on either a larger increase in December or a repeat of the Fed’s five-times increase in policy rate since March.

“The labor market is still strong, but it requires a Fed that has a lot more skill and a lot more luck because it no longer has time,” El-Erian said. 

©2022 Bloomberg L.P.

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