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Fed must do two things to restore confidence, says Allianz’s El-Erian

Mohamed El-Erian, chief economic adviser at Allianz, said the U.S. Federal Reserve is now sending a more consistent message to markets, but to rebuild its credibility: Two more things need to be done.

US Federal Reserve (Fed) Chairman Jerome Powell struck a hawkish tone in his speech at last week’s Jackson Hole economic symposium, signaling the central bank’s commitment to aggressive monetary policy tightening to keep inflation in check. and warned the U.S. economy would face “some pain”. process.

Fed officials, including Fed Chair Powell, have struggled to steer markets effectively before sending a firm message in recent months amid 40-year highs in inflation. was

El-Erian told CNBC’s Steve Sedgwick at the Ambrosetti Forum on Friday, “The more Fed officials do it, the more the market is pricing it in, but so far it’s mostly been pricing in the bond market. ‘ said.

“Other markets somehow want us to be in cyclical moments rather than more long-term, strategic ones.”

El-Erian on Allianz: Inflation means markets can no longer hold the Fed hostage

El-Erian applauded the Fed for establishing a clear and consistent message, but said two more things needed to be done to increase the credibility of forward guidance going forward.

“One is to explain to the market why the analysis was wrong and what they did about predictive power,” he said.

“And second, change that framework. Remember, we still have a framework for a world of aggregate short supply, and we are in a world of aggregate short supply. ”

El-Erian added that the current framework is geared towards an environment where inflation is “too low for too long” and is expected to remain low for an extended period of time. He suggested that central banks needed a completely new framework.

“That was the pre-pandemic world. This framework was put in place in 2021, but unfortunately it’s backwards, so we need a new framework and people realize how important a governance framework is.” I don’t think I understand it enough,” he said.

“That’s why when I look at the Fed, they say they’ve done well at one thing, but they have to do two more things if policy guidance is to be sustained going forward.

Markets had “held the Fed hostage for a long time” until inflation began to surge to a 40-year high, El-Erian said, citing policymakers’ mixed messages about the pace and magnitude of monetary tightening. We guessed what the market wanted.

“At 8.5% inflation, the market’s ability to hold the Fed hostage suddenly disappears. I think the market is starting to realize that. This wasn’t long ago, and inflation fundamentally changed the equation. “He said.

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