Economist Mohamed El-Erian, chief economic adviser to Allianz and chairman of Gramercy Funds Management, has warned that the Federal Reserve cannot hit its 2% inflation target without crushing the US economy. “A higher stable inflation rate is needed. Call it 3% to 4%,” suggested the economist.
The Fed could crush the US economy, warns an economist
Economist Mohamed El-Erian warned on Friday that the Federal Reserve cannot achieve its 2% inflation target without “crushing the economy.” El-Erian is President of Queens’ College, University of Cambridge and Chairman of Gramercy Funds Management. He is also a chief economic adviser to Allianz, the corporate parent of PIMCO, one of the largest investment managers.
“A higher stable inflation rate is needed. Call it 3% to 4%”, stressed the economist in an interview with Bloomberg Television. He emphasized:
I don’t think they can get CPI to 2% without crushing the economy, but that’s because 2% is not the right target.
El-Erian’s comments followed the government’s consumer price index (CPI) data released on Tuesday. Month-on-month, prices rose 0.5% in January, the most since October. On an annual basis, consumer prices rose 6.4% in January, down from 6.5% in December. Following the CPI report, several Fed officials said the US central bank may have to raise interest rates beyond initial expectations to control ongoing price pressures.
Allianz’s economic adviser explained that there are several factors that require a higher inflation target rate. They include supply-side developments, including an energy transition, the shift in supply chains during the pandemic, a tight job market, and changing geopolitical issues.
El-Erian said the Federal Reserve is “too dependent on data.” Noting that “it’s okay to look at the data, but you have to have a vision of where you’re going,” he warned that the problem now is that the Fed is stuck chasing an elusive 2% target. In January, El-Erian predicted that inflation could become “sticky” around the 4% range.
The economist previously warned that the Federal Reserve could lose credibility if it changes the Inflation Target. He opined:
You can’t change an inflation target when you’ve missed it so badly.
Do you agree with the economist that the Fed cannot achieve its 2% inflation target without crushing the US economy? Let us know in the comments section.
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