The United States is headed for a recession that was “entirely avoidable,” a leading economist said on Sunday. Also, Federal Reserve mistakes that will “go down in the history books” are to blame.
Mohamed El-Erian, Allianz’s chief economic adviser, made the comments to CBS Face the Nation.
One mistake the Fed made, he explained, was “mischaracterizing inflation as transitory. By that, they meant it’s temporary, it’s reversible, don’t worry about it.”
A second mistake came when the Fed acknowledged that inflation was “persistent and high,” he added. “They didn’t act. They didn’t act in a meaningful way.”
Now we’re at risk of the Fed making a third mistake, he said, which is that, after not easing off the gas last year, “they’re slowing down this year, which would lead us into a recession. . . . That’s going to taper off as a big. policy mistake by the Fed.”
Recession ahead
The Fed has raised interest rates to fight inflation, but fears of a recession are growing. This week, the fortune outlined the views of seven leading economic thinkers who believe a recession is coming.
Federal Reserve Chairman Jerome Powell himself has gone from “looking for a soft landing to a soft landing to now talking about pain,” El-Erian noted. “And this is the problem. That’s the cost of a late Federal Reserve.”
Now, he said, “markets are worried that the Federal Reserve will tip us into a recession by overreacting to strong economic news.”
Among that news, data released this week showed that the US unemployment rate fell last month from 3.7% to 3.5%. This may cause the hawkish Fed to raise interest rates again.
El-Erian is not the only top economist criticizing the Fed’s decisions. On Friday, Jeremy Siegel blasted the Fed for “braking too hard” by raising interest rates too high in an effort to fight inflation.
“If they stay as tight as they say they will, continuing to raise rates even into the first part of next year, the risks of a recession are extremely high,” he told CNBC. Asia street signs.
Siegel, a professor at the University of Pennsylvania’s Wharton School of Business, said the Fed should have started tightening monetary policy much earlier, but now “the pendulum has swung too far the other way direction”.
Tesla CEO Elon Musk backed Siegel’s views after the economist delivered a particularly spirited rant against the Fed last month. Musk tweeted on September 24: “Siegel is obviously right.”
Errors of the Fed
Siegel, like El-Erian, said the Fed had made mistakes of historic proportions: “The last two years [are] one of the biggest policy mistakes in the 110-year history of the Fed, to stay so easy when everything was booming.”
He continued: “They were too easy in 2020 and 2021, and now [impersonates the Fed], “We’re gonna be real tough guys until we crush the economy.” I mean, that’s just for me, poor monetary policy would be an understatement.”
As for El-Erian, the Fed also needs to repair its damaged reputation.
“Not only does it have to beat inflation, it has to regain its credibility,” he said on Sunday.
Sign up for the Features of Fortune email list so you don’t miss our top features, exclusive interviews and research.
