Mohamed El-Erian, the chief economic advisor at Allianz SE, is worried about a lot of things, but chief among those worries is his feeling that the Federal Reserve Board responded too slowly to curb inflation.

“They were late and they will have a difficult time” slowing the rate of inflation at this point, El-Erian said during a presentation during the second day of the Next Chapter 2022: Rockin’ Retirement virtual conference sponsored by Financial Advisor.

“The Federal Reserve Board stuck to its theory that inflation was transitory until November,” he said during the session, which was moderated by Corey Walther, president of Allianz Life Financial Services.

“Now, they recognize it is not transitory [and are raising interest rates], but they should have done it sooner. They did not explain why they took so long, and that has left the market confused,” he said.

El-Erian compared the situation to watching a car crash in slow motion and being unable to look away or do anything to stop it.

“My worry now is that the Federal Reserve is falling more and more behind about the realities on the ground,” he added. “But unless there is another major policy mistake, there is no reason we should fall into a recession.”

El-Erian predicted a “softish” landing for the economy and investors when inflation is curbed and a more normal market environment returns. The U.S. is more likely to see stagflation than a recession, he said.

Not all of the news is bad, the economist and author reassured the audience, in part because consumer confidence is still strong. “But I’m also worried about China and Covid and the geopolitical situation,” and the impact on the world’s economies that those factors will have.

For advisors and investors, “the market has become increasingly distorted,” he said. There is no safe haven in the traditional 60/40 portfolio, with both equities and bonds showing “massive” losses.

“Eventually, value will be restored, but in the meantime investors need to be selective [because] there is going to be temporary volatility,” El-Erian added.

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