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Bloomberg headshot photo of bond expert and economist Mohamed El-Erian

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El-Erian Says Fed Has Lost Credibility With Markets, Public

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What You Need to Know

  • “It increasingly has a problem with the marketplace,” the former PIMCO CEO said in an interview Friday.
  • Also, the Federal Reserve must explain why its inflation forecasts have been problematic and fix its methodology. he adds.

Mohamed El-Erian, a closely followed bond-market strategist, says the Federal Reserve has a trust problem with financial markets and the nation over inflation.

“It has a credibility issue with the American people and that is why chair (Jerome) Powell chose to address the American people at the beginning of his press conference” on Wednesday, the chair of Gramercy Fund Management and former chief executive officer of PIMCO, said on Bloomberg Television’s The Open on Friday. “It increasingly has a problem with the marketplace.”

El-Erian, a Bloomberg Opinion columnist, added that “it is essential that the Fed regain credibility. It will not do so until it does what the ECB did last week, tell us why the inflation forecasts were so wrong for so long and how to improve the inflation methodology.”

In July, El-Erian predicted that inflation, at the time running at a 5.4% annualized pace, wouldn’t be as transitory as the central bank was projecting. U.S. headline inflation as measured by the Consumer Price Index is now at 8.5%.

His critique on Friday touched as well on Powell, who said Wednesday that a 75-basis-point hike is not being “actively” considered. The Fed since 2020 kept rates as low as zero in response to shutdowns in the economy that happened as the pandemic surged.

“You cannot come on TV and speak about all the uncertainties and then rule out a certain policy response — 75 basis points,” El-Erian said. “We don’t know enough about the path of inflation to rule out certain policy actions at this point.”

Turbulence in financial markets has increased since the Fed meeting, with big declines in stocks and the Treasury 10-year yield staying above 3%, a level visited this week for the first time since 2018.

“The mess we’re seeing in the market is about liquidity,” said El-Erian. “I’m willing to put my neck out and say we have mostly priced in interest rate risk. We haven’t priced liquidity risk, we haven’t priced credit risk, we haven’t priced market functioning risk. We are still in the process of pricing it. The days of abundant and predictable liquidity are gone.”

(Photo: Wei Leng Tay/Bloomberg)

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