The Fed’s rapid rate hikes are necessary to stem inflation, but they’re pushing risks to financial stability dramatically higher, Mohamed El-Erian says

Share this post
Listen to this article
Famed economist Mohamed El-Erian says the US is still faces a real recession risk despite a strong jobs report
Mohamed El-Erian.

  • The Fed’s rapid rate-hiking pace is significantly increasing risks to financial stability, economist Mohamed El-Erian warned.
  •  In a Bloomberg column, he pointed to risks in bond markets and said non-banks that are less regulated have become the weakest links. 
  • “The faster the rate-increase cycle, the greater the risk of large financial accidents with nasty economic spillovers.”

The Federal Reserve’s late policy response has necessitated a rapid pace of rate hikes, but that has dramatically heightened risks to financial stability, according to Mohamed El-Erian. 

In a Monday Bloomberg column, the chief economic adviser at Allianz pointed to risks in G7 bond markets and said non-banks that are less regulated have become the weakest links in leverage- and derivative-heavy markets.

He said the Fed fell behind its price-stability mandate and wrongly pegged inflation as transitory last year. As a result, El-Erian said, the Fed faces a delicate balancing act between taming soaring prices without sparking a recession. 

What’s more, El-Erian noted that policymakers have been basing decisions on lagging economic data, all while the global financial landscape — from the UK to China — sees more turmoil.

Fed Chair Jerome Powell has been tasked with reversing the easy-money era of the past decade, when markets enjoyed near-zero interest rate levels and high liquidity. If the Fed is not both careful and lucky, El-Erian said, shifting away from that framework could lead to a recession as well as broad de-leveraging across the financial system and real economy. 

“The faster the rate-increase cycle, the greater the risk of large financial accidents with nasty economic spillovers,” he said, adding that the central bank has already developed a shaky reputation for stemming inflation.

“The Fed is increasingly stuck in a three-dimensional rock-versus-hard-place situation.”

Read the original article on Business Insider
READ ALSO  Airliner is struck by stray BULLET during landing as shock pic shows hole in fuselage just inches from passengers’ heads