Fed Could Have Avoided High Rates, High Recession Risk
- The Federal Reserve raised interest rates by 75 basis points on Wednesday, the third consecutive rate hike.
- It hinted at more rate hikes ahead to tame inflation, a move that risks tipping the economy into recession.
- El-Erian said higher, faster rate hikes and higher recession risks could have been avoided.
Mohammad El-Erian, chief economist, said on Wednesday that if the Fed had acted earlier to curb inflation, it could have avoided faster and longer-lasting high interest rates and a heightened risk of recession.
His comments followed Fed Wednesday raised interest rates for the third time in a row by 0.75 percentage points to curb price gains. Higher interest rates discourage borrowing, cooling demand across the economy, but the move threatens to slow growth so much that the economy could slip into recession.
After the Fed announced its rate decision on Wednesday, El-Erian tweeted that if the Fed responded in time to cool inflation, “rates would be higher, faster, and stay longer” and the heightened risk of a recession could be avoided. of. .
-Mohamed A. El-Erian (@elerianm) September 21, 2022
Fed Rates have been raised five times this year, with bigger hikes coming at a faster pace in a matter of months as it races to tame inflation, which hit a 40-year high of 9.1% in June. Inflation cooled in the ensuing months, but remained at a high of 8.3% in August.
“The Fed is forced to follow them rather than lead the market against inflation,” El-Erian wrote in a separate note. CNN review article It was announced Wednesday ahead of the central bank’s interest rate announcement. “However, by reacting too late, the Fed will make a big push into a weak domestic and global economy.”
The situation has caused many to lose faith in central banks, and politicians, companies and households may see the Fed as “part of the problem, not part of the solution,” he added. Chief Advisor of Allianz, Dean of Queen’s College, Cambridge University, UK. He was previously CEO of U.S. bond fund giant Pacific Investment Management.
“A growing number of economists are warning that the Fed will plunge 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 a break from an already fragile global economy. the carpet,” he wrote on CNN.
Current Fed Chairman Jerome Powell acknowledged at a congressional hearing in March that the Fed should have acted sooner.
“In hindsight, we should have acted sooner,” Powell said. Bloomberg. “The supply-side recovery has taken a lot longer than we thought.”
Last month, Powell warned that cooling inflation “will cause some pain for households and businesses.”
The Fed did not respond to an insider request for comment sent outside normal business hours.