The Federal Reserve “should not blink” as it addresses hot inflation, and Chair Jerome Powell faces a “huge” challenge finding ways to cool price growth without damaging the economy as he prepares to address the global central banking community, said Mohamed El-Erian.
“The Fed is so late that it’s looking at two challenges: putting the inflation genie back into the bottle and it’s looking at not creating too much damage to economic growth and inequality,” El-Erian, the chief economic adviser at Allianz SE, said on Bloomberg Television’s Surveillance on Thursday.
Powell and Fed officials are in Jackson Hole, Wyoming this week, where the central bank chief will address participants on Friday. He’s expected broadly to restate his resolve to tackle inflation as consumer price growth hovers near a 40-year high.
“It’s going to take some time because the Fed has been asleep at the wheel,” El-Erian said when asked how long it will take to get inflation back to the central bank’s 2% target. “The Fed has to focus on inflation and has to do it in a more committed fashion than it has done it so far.”
The Fed has aggressively raised interest rates this year, including back-to-back 75-basis-point hikes at its past two meetings, in an effort to drive down inflation. Fed leaders have argued that the labor market is healthy enough to withstand the tightening measures, and have indicated that they will continue to raise rates this year.
El-Erian, who is also chair of Gramercy Fund Management and a Bloomberg Opinion columnist, said the Fed has “failed” in communication and analysis, with inflation skyrocketing as officials continued to say it was largely transitory.
“I know what they should do, which is they should not blink,” he said.
El-Erian said the Fed’s policy framework -- which was unveiled at the symposium in 2020 -- is not fit for purpose.
“We have a policy framework fit for a world of deficient aggregate demand, and we are in a world for deficient aggregate supply,” he said. “So put all this together, the challenge is very big.”
--With assistance from Lisa Abramowicz, Jonathan Ferro and Tom Keene.