Economist Mohamed El-Erian: Most of the current inflation ‘could have been avoided’ if the Fed had acted sooner

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Much of the current record high inflation could have been avoided had the Federal Reserve acted sooner and shown humility after it mislabeled inflation as “transitional”, economist Mohamed El-Erian said on Sunday. .

El-Erian, chief economic adviser at Allianz, appeared on CBS’ “Face the Nation” to discuss the cause of current inflation and its likely direction.

“We got here because we had a combination of things,” El-Erian said, citing the war in Ukraine, the energy transition and how the Fed misjudged inflation and fell behind.

“All of these things have come together and are now fueling this inflation of everything. The price of almost everything is going up and making us feel really insecure,” he said.

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El-Erian said most of the inflation “could have been avoided if early action had been taken” by the Fed, which now needs to regain its credibility to assuage long-term inflation expectations.

The Federal Reserve has been slow to act on inflation and now needs to regain credibility to quell long-term inflation expectations, El-Erian said.
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The Federal Reserve has been slow to act on inflation and now needs to regain credibility to quell long-term inflation expectations, El-Erian said.
(Photo by Chip Somodevilla/Getty Images)

“I was very puzzled when a year ago so many people were so convinced that inflation was transitory,” he said. “There was so much we didn’t understand about post-COVID inflation that humility would have been a good idea.”

El-Erian said things were still not looking good for the Fed because it has yet to explain why it got the forecast wrong for “so long.”

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El-Erian fears that in this period of “stagflation” – low growth, high inflation – inflation will reach 9%. He called it the darkest picture of what could lead to a recession.

He added that his most optimistic outlook is for the Fed to regain control of inflation, leading to a “soft landing” – meaning inflation falls without sacrificing growth.

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