A top economist slammed the Federal Reserve on Sunday, saying Chairman Jerome Powell’s decision to describe the wave of price increases as “transitory” was a terrible move.
“The characterization of inflation as transitory is probably the worst inflation call in the history of the Federal Reserve, and it results in a high probability of a policy mistake,” Allianz chief economic adviser Mohamed El-Erian said on CBS’s “Face the Nation.”
“So, the Fed must quickly, starting this week, regain control of the inflation narrative and regain its own credibility. Otherwise, it will become a driver of higher inflation expectations that feed onto themselves.”
The former Pimco CEO and current Queens College president has repeatedly said this year that the Fed is underestimating the inflationary risks in the US economy.
El-Erian said Sunday that the Fed can still address inflation head-on if it moves quickly to “ease their foot off the accelerator” by gradually tightening monetary policy.
But, he added, if it waits any longer, it may need to “hit the brake hard” in a few months, risking a recession.
“There is the possibility that they may have to raise rates,” he said.
“Look, it’s important to stop inflation being embedded into the system because two things happen when inflation gets embedded. One, you lose purchasing power, and the poor suffer the most. Second, you get a Fed overreaction and then you get a recession and then you get income losses. So, you really want to navigate this process in a timely and orderly way.”
The Bureau of Labor Statistics said last week that the Consumer Price Index of food, energy, goods and services spiked a whopping 6.8 percent last month, its fastest 12-month acceleration in 39 years.
Everything from food and gasoline to rent is substantially higher than it was a year ago, the report showed.
Powell and other Fed officials have consistently written off the price spikes as temporary pandemic-related issues that will temper in the coming months.
But with no signs of abatement in the recent price reports, economists like El-Erian have increasingly sounded the alarm that inflation could be here to stay for longer than expected.