Economist Mohamed El-Erian, chief economic adviser to Allianz and chairman of Gramercy Funds Management, warned that the Federal Reserve could not meet its 2% inflation target without crushing the US economy. “You need a higher stable inflation rate. Call it 3% to 4%,” the economist suggested.
Fed could crush US economy, 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, University of Cambridge and Chairman of Gramercy Funds Management. He is also Chief Economic Advisor 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 pointed out:
I don’t think they can get the CPI to 2% without crushing the economy, but that’s because 2% is the wrong target.
El-Erian’s comments followed government consumer price index (CPI) data released on Tuesday. On a month-to-month basis, prices rose 0.5% in January, their biggest gain 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 U.S. central bank may need to raise interest rates beyond initial expectations in order to rein in continued price pressures.
Allianz’s economic adviser explained that several factors call for a higher target inflation rate. They 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 dependent on data.” Noting that “it’s fair to look at the data, but you have to have a vision of where you’re going,” he warned that the problem now is that the Fed is stuck chasing an elusive 2% target. In January, El-Erian predicted inflation could get “sticky” around the 4% range.
The economist previously warned that the Federal Reserve could lose credibility if it changes the inflation target. He issued the following opinion:
You can’t change an inflation target when you’ve missed it that badly.
Do you agree with the Economist that the Fed cannot meet its 2% inflation target without crushing the US economy? Let us know in the comments section below.
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