El Erian: Powell sent the right message but repeated the mistakes of the past

Federal Reserve Bank President Jay Paul sent the right message from Jackson Hole to markets about the bank’s determination to curb inflation, but he failed to avoid past policy mistakes in his speech, according to renowned economist Mohamed El They were.

“He finally sent the right message. He should have done it months ago,” Allianz’s financial adviser told CNBC. “He was clear. He was clear, he stuck to his plan and he did it in eight minutes. And the market is starting to realize that when the head of the Fed tells you inflation 45 times in eight minutes, something changes. That’s the good news.” he said.

It is recalled that in his speech at the Fed’s annual symposium in Jackson Hole, Wyoming, Jay Paul said that the Bank’s fight against inflation will bring “some financial pain” to US households but that price stability is critical to the maintaining a strong labor market.

At the market level, Wall Street greeted Powell’s speech with heavy losses – 1,000 points for the Dow Jones and 3.4% for the S&P 500 – which continued yesterday, Monday, but more gently.

“The less good news is that he has failed to fix the policy mistakes of the last 18 months,” Mohamed El Erian continued.

“Powell will have to do it at some point and he hasn’t addressed the fact that there is a monetary framework that is not fit for purpose,” he added.

As El Erian explained, if the U.S. central banker “sticks to his script, we should expect more talk of aggressive moves as we go forward. But there are people who doubt that he will do it. So there’s the ambiguity, and that’s something where the market should go”.

Mohamed El Erian cited an interview with economist Jeremy Spiegel, in which the Wharton professor said Powell did not guide markets on specific inflation measures the Fed is considering. Spiegel also pointed out that there is a risk that the Fed will tighten monetary policy too much, following recent data showing a slowdown in inflation.

According to El Erian, there were significant “disconnects” between financial markets, the Fed and economic data. “This was all a function of unclear communication [του Πάουελ]”, he said.

“Powell’s Jackson Hole speech should have re-aligned market expectations as financial conditions have eased significantly at a time when Bank management is attempting to tighten financial conditions,” El-Erian said. “He had no choice. Now the question is whether he will continue.”