Editor’s Note: Mohamed A. El-Erian is Dean of Queens College, Cambridge, Renee Kerns Professor at Wharton, Senior Fellow at the Lauder Institute, and advisor to Allianz and Grammys. He serves on the boards of Barclays, NBER and Under Armour. The views expressed in this review are his own.
This week, global economists and policymakers will see more clearly that the Fed is in a Catch-22 situation of its own making. Forced by concerns about high and persistent inflation, the Federal Reserve could go down in history for raising rates by the same amount in three consecutive policy meetings. But because it is doing so amid a weakening economy, it will face criticism that it is hurting not only domestic economic well-being, but global growth as well.
The unfortunate situation the Fed is in — damn if you do it, damn it if you don’t — illustrates a deeper problem. The Fed missed the window during which a “soft landing” of the economy was feasible (ie, lowering inflation without doing too much damage to the economy), and now, painfully, the Fed finds itself far from a world of “best” decisions. In other words, instead of mastering efficient, timely, and well-targeted measures to fight inflation, the Fed has ended up in a world where nearly every policy action can cause significant collateral damage and unintended adverse consequences. Many politicians, companies and households risk seeing the Fed as part of the problem rather than part of the solution.
Possibly a record third consecutive hike of 75 basis points against a backdrop of disruptive cost-of-living growth, widening scope and, worse, its increasing integration into the economic fabric. Headline inflation, currently at 8.3%, may be falling, but core inflation, which excludes more volatile categories such as food and gas, is still rising. The latter, currently at 6.3%, measures the breadth and likely persistence of inflation.
Yet for almost the entirety of last year, the Fed has been downplaying the threat of inflation. At the same time, the economy continues to be constrained to operate at zero interest rates; repeated interventions by the Federal Reserve to offset falling stock prices (the so-called “Fed Puts”) continue to comfort the market.
But it wasn’t until the end of November last year that the Fed stopped repeatedly reassuring us that inflation was “transient.”Just a few months ago it was pumping fluidity Enter the economy with rapidly rising inflation.
Now, the Fed realizes that it has been very slow to respond.By allowing inflation to become more entrenched — or, as chairman Jerome Powell Said last month, “to spread throughout the economy” – the Fed has to be far more aggressive now than it would have been to respond in a timely manner. The Fed also needs to avoid another blow to its already damaged reputation and policy credibility.
The Fed is forced to follow them instead of leading the market against inflation.Until Powell last month Jackson Hole Economic Symposium, it has repeatedly been forced to revise its policy guidance to be more in line with market signals. Combined with the seemingly endless one-way revisions to key economic forecasts (higher inflation and lower growth), this has unfortunately transformed the Fed’s economic and financial role from a trusted leader to a scrambling laggard By.
However, with a sluggish response, the Fed will make a big push into a weakening domestic and global economy. As a result, a growing number of economists are warning that the Fed will tip the U.S. into recession; a growing number of foreign policy makers are complaining that the world’s most powerful and systemically important central bank is taking money out of an already fragile global economy Withdraw the carpet. That’s a far cry from the Fed’s acclaimed role in helping avert a devastating global depression in 2008-2009 and, more recently, 2020.
This week’s policy action is likely to appear in three distinct parts of our economic history book: the Fed’s first three consecutive rate hikes by 75 basis points; another component of the central bank’s biggest policy mistake in decades; an unusual The example is where central banks in developed countries find themselves caught in policy loopholes that are more familiar to some of their developing counterparts.
