Mohamed El-Erian says the Fed’s mistakes could push the recession

  • Top economist Mohamed El-Erian said the Federal Reserve made two big mistakes that he believes will go down in history.
  • “I’m afraid we risk a very high chance of a damaging recession that could be completely avoided,” he said on Sunday.
  • The Fed quickly raised interest rates in an effort to reduce 40-year high inflation.

Top economist Mohamed El-Erian said the Fed “made two big mistakes that I think will go down in the history books” and cause a “damaging” recession.

Speaking on CBS’ “Face the Nation” on Sunday, El-Erian told host Major Garrett, “I’m afraid we risk a very high chance of a damaging recession that could be completely avoided.”

Allianz’s chief financial adviser pointed to two mistakes made by the Federal Reserve. He said the Fed’s first mistake was to mischaracterize inflation as transitory. “By that, they meant it’s temporary, it’s reversible, don’t worry about it,” he said.

The second mistake was when the Fed finally recognized that inflation was persistent and high, but “did not act in a meaningful way,” he added.

Using a driving analogy, El-Erian said the Fed’s failure to ease off the gas last year meant they had to hit the holidays this year “which would lead us into a recession.”

“Well, yes, unfortunately, this is going to come down to a big policy blunder by the Federal Reserve,” he said. “Even [Federal Reserve] President Powell has gone from looking for a soft landing to a soft landing to now talking about pain. And that’s the problem. This is the cost of delaying a Federal Reserve. Not only does it have to overcome inflation, but it has to restore its credibility,” he said.

Earlier this month, El-Erian advised investors to end their “love affair” with a Fed pivot where the central bank would reverse its course of aggressive monetary tightening.

The Fed quickly raised interest rates in an effort to reduce inflation in the US economy, a 40-year high.

The September inflation report is due out on Thursday. The Fed is expected to raise rates for a sixth time at its November 1-2 meeting to push the federal funds rate from the current range of 3% to 3.25%. In its last three meetings, the Fed has raised the benchmark interest rate by 75 basis points.

Changes in the federal funds rate — the interest banks charge each other to borrow money overnight — affect interest rates on loans, credit cards and bank accounts. When mortgage rates rise, potential home buyers can be pushed out of the market due to a lack of affordability.

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