The U.S. economy wont be able to avoid a bout of stagflation and markets have yet to tune into the risk of a significant slowdown in growth, said Mohamed El-Erian, the chair of Gramercy Fund Management and former chief executive officer of Pimco.
While the U.S. can perhaps avoid a recession, what is unavoidable is stagflation, El-Erian told Bloomberg Televisions Francine Lacqua. Weve seen growth coming down and were seeing inflation remaining high.
He blamed the situation in part on the Federal Reserves view from 2021 that inflation would at some point fade. Its since retired the transitory thesis and is now tightening monetary policy, with Chair Jerome Powell saying Tuesday that interest rates will be raised until theres clear and convincing evidence that inflation is in retreat.
The Fed is finally catching up to developments on the ground, said El-Erian, who contributes to Bloomberg Opinion. But it still has some way to go.
Stagflation is the worst thing for central banks, especially for the Fed because it puts its two objectives in conflict with each other, he said. This situation was avoidable, had the Fed not stuck to its transitory inflation characterization.
The Fed is going to have to make a very difficult choice, El-Erian said. A lot of people say it needs luck and skill. It needs a lot of luck at this point.
As for how investors should respond, he said they have still to price in a significant slowdown in growth, which means theres more of an adjustment to make.
The post El-Erian says US cant avoid stagflation even as Fed tightens appeared first on InvestmentNews.
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