The Fed can’t even turn a blind eye to inflation after it “fell asleep at the wheel” and Jerome Powell faces a huge challenge to find a way to control prices without damaging the economy, says the famous economist Mohamed El Erian.
“The Fed has delayed so long that it now faces two challenges. Putting the inflation genie back in the bottle and not doing too much damage to economic growth and inequality,” said Allianz’s chief economic adviser, speaking today on its television Bloomberg.
Fed Chairman Jerome Powell and bank officials are in Jackson Hole, Wyoming, where the head of the world’s most powerful central bank will deliver a speech tomorrow, Friday. He is widely expected to reiterate his determination to tackle inflation, which is running at a near 40-year high.
Asked how long he thinks it will take for inflation to return to the Fed’s 2% target, Mohamed El-Erian characteristically replied that “it will take some time because the Fed fell asleep at the wheel.”
“The Fed needs to focus on inflation, and it needs to do it in a more committed way than it has done so far,” he added.
It is recalled that the US central bank has aggressively raised its interest rates this year, with its moves including two consecutive increases of the order of 75 basis points (0.75%) in its last two meetings, in order to curb inflation.
Bank officials believe the labor market is strong enough to withstand the tightening and have indicated they will continue to raise interest rates later this year.
According to Mohamed El Erian, the Fed “failed” in both its communication and its analysis, as while inflation was soaring its officials continued to say it was largely transitory.
“I know what they have to do, which is to not even blink,” said the renowned economist and Bloomberg columnist.
El Erian also said that the policy framework presented by the Fed at the Jackson Hole Symposium in 2020 is no longer fit for purpose today.
“We have a policy framework fit for a world of insufficient demand and we are in a world of insufficient supply,” he said. “So if you put all of that together, the challenge is very big.”
Source: Capital
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