One of the biggest policy threats to economic stability in the coming 18 months is that the Fed will end up in a go-stop-go cycle—that is, raise rates and then stop, only to be forced to start again. A first late and then flip-flopping Fed would condemn the US economy to a much longer period of painful stagflation and increase the risk of recession.
For years, the Fed has shown great willingness to step in to counter pressure on asset prices, and this willingness may well remain in place. But it is no longer a determining factor. What is in play now is ability. That ability will not be restored by September unless inflationary indicators drop sharply due to a consequential and highly damaging fall in economic activity. And that’s not something investors should wish for.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. A former chief executive officer of Pimco, he is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE; and chair of Gramercy Fund Management. He is author of The Only Game in Town.