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September 29, 2022 at 03:04 PM
What You Need to Know
- The Fed's recent policy moves resemble behavior found in developing countries, Mohamed El-Erian wrote.
- The Fed has damaged its credibility and must act to contain the harmful consequences, he wrote.
- But forgoing further rate hikes could cause its own problems, he warns.
Economist Mohamed El-Erian likened the Federal Reserve’s recent policy moves to behavior typically seen in developing countries and suggested investors expect more “collateral damage” from the central bank’s aggressive monetary tightening stance.
The Fed has damaged its credibility and must act to contain the harmful consequences, the Allianz chief economic advisor said Wednesday in an opinion piece on Project Syndicate.
“Financial markets’ reaction to the U.S. Federal Reserve’s latest policy move was reminiscent more of developing countries than of the world’s most powerful economy,” El-Erian wrote.
“Given that the Fed is the world’s most systemically important central bank, this is more than just a curiosity. It has implications for America’s economic well-being — and that of the rest of the world,” he added.
El-Erian’s commentary came as stocks fell sharply this week after Fed officials dug their heels into plans to keep raising interest rates to subdue high inflation.
He noted the Fed recently reemphasized its policy on “pushing interest rates higher, faster, and for a longer duration than previously anticipated,” implementing “an unprecedented third successive 75-basis-point rate increase” and signaling it would add another 125 basis points this year.
“The Fed’s revision of its economic projections painted a darkening picture for the United States and most other economies. It is forecasting not only lower growth but also, and more surprisingly, higher inflation — something that it has done repeatedly in recent quarters,” he wrote.
“The Fed’s latest moves are consistent with a central bank that is continuously scrambling to catch up with realities on the ground,” El-Erian added. “It is the kind of thing that one typically finds in developing countries with weak institutions, not in the issuer of the world’s reserve currency and the custodian of the world’s most sophisticated financial markets — where many other countries and companies entrust their savings.”
