The Federal Reserve’s delay of interest-rate cuts in a bid to temper inflation runs the risk of falling behind the curve, according to Mohamed El-Erian.  

“The Fed pivoted on the basis of data. It was the opposite of the pivot that they did in December—now they have to do a U-turn,” El-Erian, the president of Queens’ College, Cambridge and a Bloomberg Opinion columnist, told Bloomberg Television on Friday. “As they are doing the U-turn and stay higher for longer, the market is going the other way.” 

“The Fed is going to have to pivot—not on the basis of inflation numbers, but the basis of the real economy,” he added.

Like other market watchers, El-Erian has previously raised the possibility that the U.S. central bank should look beyond its 2% inflation target in a new era of structurally higher pressures on price growth.      

“Is the inflation target the right target? We all talk about wanting to go back to 2%,” El-Erian said. “Two percent is totally arbitrary. If we are pursuing the wrong inflation target, the risk of a mistake—that mistake would mean sacrificing growth unnecessarily—the risk of a mistake is high.” 

“It’s a world that’s subjected to higher inflation. And we’ve come from a world that was subject to lower inflation,” he added. 

On Wednesday, Treasurys rallied after a reading of consumer prices showed that headline growth eased in April, with investors bolstering wagers that the Fed will ease by as many as two quarter-point cuts come December. But inflation reports have also illustrated that for some areas of the service economy price growth is proving harder to tame. 

This article was provided by Bloomberg News.