Although it has now established a more consistent messaging to the market US Federal Reserve System According to its chief economic adviser, Mohamed El-Erian, it needs to do two more things to restore its credibility. Allianz.
Fed Chairman Jerome Powell struck a hawkish tone during a speech at the Jackson Hole Economic Symposium last week, reinforcing the central bank’s commitment to aggressive monetary tightening to curb inflation. Warning that the US economy will experience “some pain” in the process.
In recent months, Powell and other Fed officials have struggled to manage markets effectively, before delivering a firm message that inflation has reached a 40-year high. Accepting the blame for inaccurate predictions during 2021 that inflation will be “transient”.
“The more Fed officials do this, the more the market appreciates it, but so far the pricing has been mostly fixed-income markets,” El-Erian told CNBC’s Steve Sedgwick at the Ambrosetti Forum on Friday.
“Other markets are somehow hoping that we’re in a cyclical moment rather than what I think is a more mundane and strategic moment.”
El-Erian credited the Fed with creating a clear and consistent message, but said it would need to do two more things to give it credibility going forward.
“One is to explain to the market why it got its analysis so wrong and what it did with its forecasting ability,” he said.
“Second, reframe it. Remember, we still have a framework for a world of deficient aggregate demand, and we’re in a world of deficient aggregate supply.”
El-Erian added that the current framework is tailored to an environment where inflation has been “very low for a very long time” and is expected to remain low for a long time. I have suggested that central banking needs an entirely new framework.
“This was the world before the pandemic. This framework was introduced in 2021, but unfortunately it looks backwards, so we need a new framework and I don’t think people understand how important the governance framework is,” he said. . .
“So when I look at the Fed, I say they’ve done a great job at one thing, but there are two more things they need to do to ensure they’re committed to future policy guidance.”
Until inflation began to climb to a 40-year high, El-Erian said the market had “held the Fed hostage for a long time,” taking out policymakers’ mixed messages about the pace and scale of monetary tightening.
“Once you bring in an 8.5% inflation rate, all of a sudden the market’s ability to hold the Fed hostage collapses. I think the market is starting to realize that – it’s not the old days, the inflation equation has fundamentally changed,” I said.
