Fed Behind on Inflation and Risking Recession, International Finance Expert Says

A senior African-American woman in her 60s shopping in a grocery store, carrying a shopping basket.
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Allianz chief economic advisor Mohamed El-Erian told CNBC yesterday in a video interview that he believes Federal Reserve officials are underestimating inflation at the risk of sparking a recession. Allianz is a multinational financial services company headquartered in Munich, Germany.

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The Fed has recently held the stance that the inflation is only transitory, triggered by rapid economic recovery as COVID-19 vaccines become more widespread and businesses reopen. The inflation is further compounded by supply chain issues and demand vastly exceeding supply for items ranging from lumber to consumer goods.

The central bank believes that once the one-off bottlenecks subside, inflation will stabilize. However, the year-over-year increase of 3.4% this May is the fastest increase since April 1992, which came following the U.S. recession of the early 1990s.

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Now, El-Erian warns that the U.S. could fall into yet another recession on the heels of economic recovery following the pandemic-related recession that begin in February 2020. “Every day I see evidence of inflation not being transitory, and I have concern that the Fed is falling behind and that it may have to play catch-up, and history makes you very uncomfortable if you end up in a world in which the Fed has to play catch-up,” he said in an interview with CNBC’s “Squawk Box.”

If the Fed has to quickly pump the brakes on inflation by raising interest rates, it could halt further economic growth and thrust the U.S. into yet another recession. Thus far, the Fed maintains that it won’t raise interest rates until early 2023.

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See: Fed to Hike Rates Early in 2023, Raises Inflation ProjectionFind: What Is the GDP — and What Does It Have to Do With You?

The National Bureau of Economic Research says the pandemic-related recession has not yet ended, but the gross domestic product seems to imply it is, at least, very close to over. CNBC reports that the GDP is just slightly lower than it was when the pandemic began.

El-Erian told CNBC he’s not concerned in the short-term. “I feel pretty good in the short-term. Boring markets tend to be positive markets. Every day we get reinforcement that global growth is picking up.”

He continued, “The market has gotten very relaxed because the Fed top management is very relaxed. As long as the Fed believes [inflation is] transitory, that is what matters for the markets.”

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