Whether traditionally thought of as “hawks” or “doves,” Federal Reserve officials have recently converged to notable uniformity in their policy signaling of high interest rates for longer. This has come at a time when more Wall Street analysts are embracing a wider band of uncertainty for their projections of economic growth and inflation. It is a situation that raises three risks to economic prosperity and financial stability.

Shaken by a string of hotter-than-expected readings for all the major inflation measures in the first quarter, Fed officials have become more cautious about their previous expectations for continuously softening price pressures. Chair Jerome Powell summed up this shift last week when he said that his confidence in lower inflation is “not as high” as it was at the start of the year.

With a more chastened view on inflation—and against the backdrop of a damaging mischaracterization of inflation as “transitory” in 2021—recent speeches by Fed officials have uniformly noted the importance of giving more time for restrictive monetary policy to work. The officials have pulled back on their expectations of rate cuts, saying that April’s less troubling inflation data was not enough of a confidence boost. Indeed, as Governor Christopher Waller re-iterated on Tuesday, Fed officials are looking for “several more” good inflation prints before reducing rates.

Such uniformity doesn’t promise the economy and markets a free ride from here as it comes during a period when confidence in the Fed’s judgment and effectiveness has already been shaken. Indeed, three risks stand out.

The first has to do with how highly and, I would argue, excessively reactive the Fed has become in its policy approach or, to use the most popular Fed phrase these days, its “data-dependent” approach. This led the central bank to pivot to more dovish signaling just last December, in turn giving markets the confidence to price in six or seven rate cuts for this year. The string of favorable inflation readings that prompted the pivot then gave way to less comforting data in the first quarter and, with that, the ongoing U-turn, with markets now expecting only one or two cuts.

Such a reactive approach is problematic in a world subject to so many uncertainties. It is even more problematic for an institution whose policy tools act with a lag, and where the remaining drivers of inflation are less sensitive to interest rates.

The second risk is that the U-turn coincides with a growing number of companies expressing concern about weakening consumer demand. This is particularly the case for those serving lower-income households where pandemic savings have been totally depleted, credit card balances have risen, and the capacity to incur debt is at, or very near, its limit. The weakness at the lower end of the income ladder is starting to migrate up, increasing the economy’s reliance on labor market strength as its sole and critical defense against an uncomfortably high probability of recession.

The third risk is that the Fed’s policy signals are calibrated using an outdated inflation target of 2%. Remember, 2% is not the output of some sophisticated econometric model that seeks to find an optimal steady-state level for inflation that is consistent with the structural realities of the economy and the Fed’s other (employment) mandate. Rather, it is an arbitrary target that originated in New Zealand in the 1990s and that the Fed adopted after others including the Bank of England and the European Central Bank. It is a target that proved mostly non-binding in a world benefiting from one favorable supply shock after another, and where central bank credibility had been deeply rooted by Paul Volcker, the legendary Fed chair.

As I have argued before, 2% may now be too low a target for a domestic economic approach that is no longer anchored by the “Washington Consensus” of liberalization, de-regulation and fiscal discipline. We are living in quite a different economic policy paradigm in the U.S. Indeed, you need only note the unusually high budget deficit concurrent with 27 successive months of below 4% unemployment, as well as the proliferation of industrial policy and the spending needed to support announced government initiatives.

The 2% inflation target is also being challenged by a changing global paradigm. The uber-globalization quest for ever closer integration has given way to fragmentation and the weaponization of trade and investment tools. This again is turning secularly dis-inflationary winds into inflationary ones.

The combination of these three risks means that the current uniformity in Fed views, especially if maintained for more than a few months, risks unnecessarily undermining growth. A weakening of the most effective locomotive of global economic expansion would be accompanied by more pronounced currency and interest rate volatility, hitting over-indebted parts of the economy, such as commercial real estate, which are yet to be viably refinanced or have their assets disposed of in an orderly fashion.

I suspect that the question for monetary policy going forward is not whether the Fed will flip-flop again. Another U-turn is almost certainly in the cards for a central bank that continues to lack a strategic anchor, and that will react belatedly to growth slowing more than policymakers expect or are comfortable with. The critical question is whether this occurs in time to avoid significant economic and financial damage, particularly to the most vulnerable segments of the population.

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.

This article was provided by Bloomberg News.