Economist Mohamed El-Erian, Allianz’s chief economic advisor and chair of Gramercy Funds Management, has warned that the Federal Reserve cannot achieve its 2% inflation target without crushing the US economy. “You need a higher stable inflation rate. Call it 3% to 4%,” the economist suggested.
The Fed Could Crush US Economy, Economist Warns
Economist Mohamed El-Erian warned on Friday that the Federal Reserve cannot achieve its inflation target of 2% without “crushing the economy.” El-Erian is president of Queens’ College, Cambridge University, and chair of Gramercy Funds Management. He is also chief economic adviser at Allianz, the corporate parent of PIMCO, one of the largest investment managers.
“You need a higher stable inflation rate. Call it 3% to 4%,” the economist stressed in an interview with Bloomberg Television. He stressed:
I don’t think they can get CPI to 2% without crushing the economy, but that’s because 2% is not the right target.
El-Erian’s comments followed the government’s consumer price index (CPI) data released Tuesday. On a month-by-month basis, prices increased by 0.5% in January, the most since October. On an annual basis, consumer prices climbed 6.4% in January, down from 6.5% in December. Following the CPI report, several Fed officials said the US central bank may have to raise interest rates beyond initial expectations in order to subdue the ongoing price pressures.
The Allianz economic advisor explained that there are several factors that necessitate a higher target inflation rate. They include supply-side developments, including an energy transition, the change in supply chains during the pandemic, a tight labor market, and shifting geopolitical issues.
El-Erian said the Federal Reserve is “too data dependent.” Noting that “It’s right to take data into account but you’ve got to have a view of where you’re going,” he cautioned that the problem now is that the Fed is stuck chasing an elusive 2% goal. January, El-Erian predicted that inflation may become “sticky” around the 4% range.
The economist previously warned that the Federal Reserve could lose credibility if it changes the inflation Target. He opined:
You can’t change an inflation target when you’ve missed it in such a big way.
Do you agree with the economist that the Fed cannot achieve its 2% inflation target without crushing the US economy? Let us know in the comments section below.
Image Credits: Shutterstock, Pixabay, Wiki Commons
Disclaimer: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.