As a result, the Fed “is going to have to make a very difficult decision.” The central bank can continue to raise rates to fight inflation at the risk of tipping the economy into recession, or ignore rising consumer prices and hope that slower growth will bring inflation back to target levels.
However, El-Erian broke with constant Wall Street predictions of an impending recession, telling Bloomberg that a full-blown recession for the US economy is not guaranteed. But stagflation, he said, is now “inevitable”, and stock market investors have yet to assess the “significant slowdown in growth” ahead.
“We’ve seen growth fall and we’re seeing inflation stay high,” El-Erian said. “The Fed is finally catching up to developments on the ground, but it still has a long way to go.”
“A lot of luck is needed right now”El-Erian added.
The economist went on to argue that the current situation of stagflation could have been avoided if the Fed had raised interest rates while the economy was still recovering from the pandemic rather than being too attached to its “transient” characterization of inflation. Now the central bank faces a nightmarish situation as it tries to raise interest rates to slow growth.
Even former Fed Chairman Ben Bernanke admitted in an interview with the New York Times last week that the Federal Reserve’s belated response to rising consumer prices “was a mistake” that would lead to a period of stagflation.
The chairman of the Fed, Jerome Powell, he insisted that inflationary pressures would cool as a result of the pandemic, but in recent months, his tone has changed dramatically. At the Wall Street Journal’s Future of Everything festival on Tuesday, Powell said the Fed will continue to raise interest rates until there is “clear and convincing” evidence that inflation is returning to the 2% target level.
It’s an aggressive swing that put stocks under pressure once again on Wednesday after a multi-day rally that began late last week.
The good news is that the consumer may be strong enough to resist a stagflation environment due to “significant savings that have been accumulated during the pandemic” amid fiscal stimulus, El-Erian said.
However, he noted that “there are very vulnerable segments of the population and, so far, we have not seen enough being done to protect them.”
Source: Ambito
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