The US economy will not be able to avoid a period of stagnation and markets have not yet reacted to the risk of a significant slowdown in growth, said Gramercy Fund Management CEO and former Pimco CEO Mohamed El Erian.
“While the US may be avoiding a recession, what is inevitable is stagnant inflation,” El Erian told Bloomberg. “We have seen growth slow down and we see inflation remaining high,” he said.
El Erian blamed the situation in part on the US Federal Reserve (Fed) view from 2021 that inflation would fall at some point. It has since withdrawn its stance on “transient” inflation and is now tightening monetary policy, with President Jerome Powell saying on Tuesday that interest rates would rise until there was “clear and convincing” evidence that inflation was falling.
“The Fed is finally keeping pace with developments,” he said, adding: “But there is still a long way to go.”
Stagflation is “the worst thing for central banks, especially the Fed, because it pits its two targets into conflict,” he said. of parody inflation “.
The Fed “will have to make a very difficult choice,” El Erian added. “Many say it takes luck and skill. It takes a lot of luck at this point.”
As for how investors should react, he said they should expect a “significant slowdown in growth”, which means more adjustment needs to be made.
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Source: Capital
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