Recession or Prolonged Inflation: The Fed Must Decide Between Two Policy Mistakes, Says Economist

Allianz Chief Economic Advisor Mohamed El-Erian says the Federal Reserve will have to “decide between two policy mistakes.” One risks triggering a recession and the other could prolong inflation well into 2023. “I think the time has passed for a soft landing,” the economist stressed.

Mohamed El-Erian on Inflation, Recession, and the U.S. Economy

Economist Mohamed El-Erian discussed where the U.S. economy is headed and the Federal Reserve’s plan to bring inflation under control in an interview with Bloomberg Friday.

El-Erian is Chief Economic Advisor at Allianz, the corporate parent of PIMCO, one of the largest investment managers, where he was CEO and co-chief investment officer. He is also the president of Queens’ College, Cambridge University.

He was asked what’s feasible for Federal Reserve Chairman Jerome Powell under the current economic environment. The economist replied that “at best,” it is “what Chair Powell called a ‘softish’ landing, and the ‘ish’ is really important.” He elaborated:

I think the time has passed for a soft landing.

He continued: “We could have done it but that would have implied the Fed moving nine months ago. It should have. It didn’t. So, instead of tightening into a growing and dynamic economy, it is tightening into a slowing economy.”

Noting that “it is very difficult to get a soft landing,” the economist stated that “the best you can hope for right now is a soft-ish landing.” However, he said the probability of that happening is “Not as high as [he] would like it to be.”

El-Erian further opined:

The Fed is going to have to decide between two policy mistakes. Hit the brakes too hard and risk a recession or tap the brakes in a stop-go pattern … and risk having inflation well into 2023.

The Allianz economist is not the only one warning that the U.S. economy could be headed towards a recession. Tesla CEO Elon Musk said last week that we are either already in a recession or approaching it. However, he sees it as a good thing.

Blackrock, the world’s largest asset manager with nearly $10 trillion under management, similarly said last week:

If they [the Fed] hike interest rates too much, they risk triggering a recession. If they tighten not enough, the risk becomes runaway inflation.