El-Erian: Fed And Biden Risk Inflation Misstep But Still Time to Correct

The Fed is living in the past when it comes to economic policy and specifically tackling inflation – that’s the view respected economist and analyst Mohamed El-Erian, president of Queen’s College, Cambridge and adviser to Allianz, where he was formerly its chief economist.

El-Erian thinks that the US Federal Reserve s currently stuck in an old mindset that is fixated on “deficient aggregate demand” which is ill-suited to dealing with “the current reality of supply bottlenecks and labour shortages”.

US inflation is currently at a 30-year high of 6.2%. The cost of living is starting to affect spending patterns, with gasoline price up 50% and even the cost of Thanksgiving dinners jumping higher as agricultural commodity prices spike.

El-Erian: “deficient aggregate demand” no longer the issue

“Captive to the wrong mindset, it is also now hostage to a “new monetary framework” designed for the old world of deficient aggregate demand and not the current reality of supply bottlenecks and labour shortages. As a result, the Fed has missed some important policy windows to reduce the risk of unanchored inflationary expectations,” writes El-Erian in the Financial Times.

What he identifies as a “transformational” economic programme could be derailed by the failure to tackle inflation.

And with mid-term Congressional elections in 2022 looking more and more likely to entail losses for the Democrats, in no small part because of the rising cost of living, he thinks we could be about to see a re-run of what happened 10 years ago under the Obama presidency.

Aside from the politics, he draws parallels between the Obama administrations slowness to appreciate how the 2008 financial crisis had exposed deep structural problems facing the US economy and how the Biden administration has failed to fully appreciate how inflationary pressures were building up in the US economy.

Obama’s administration thought it was dealing with a cyclical issue when in fact it was one of deeply unequal growth that was leading to “secular stagnation”.

Now the Biden administration, attached to a “new monetary framework” that doesn’t work in our new world, is caught similarly off beam.

Inflation will undermine economic recovery; hit poor hardest

As El-Erian puts it: “The persistence of high inflation would hit the poor particularly hard and undermine economic recovery, both unnecessarily so.

“It also creates harmful headwinds for the continued implementation of the Biden administration’s economic agenda while also potentially complicating the much-needed general pivot in favour of climate-friendly investments.”

El-Erian believes there is till time to change course, although that may not come soon enough to save the Democrats from a “shellacking” at the ballot box.

Changes at the top of the Fed, notably the nomination of Lael Brainard, may see the Fed change tack, which for El-Erian means an acceleration in the already overdue tapering of asset purchases.

If the Fed sticks to the current schedule the purchases will not come to an end until June next year. The problem with that is it means the Fed will be continuing to pour oil on the flames.

About Gary McFarlane PRO INVESTOR

Gary was the production editor for 15 years at highly regarded UK investment magazine Money Observer. He covered subjects as diverse as social trading and fixed income exchange traded funds. Gary initiated coverage of bitcoin and cryptocurrencies at Money Observer and for three years to July 2020 was the cryptocurrency analyst at the UK's No. 2 investment platform Interactive Investor. In that role he provided expert commentary to a diverse number of newspapers, and other media outlets, including the Daily Telegraph, Evening Standard and the Sun. Gary has also written widely on cryptocurrencies for various industry publications, such as Coin Desk and The FinTech Times, City AM, Ethereum World News, and InsideBitcoins. Gary is the winner of Cryptocurrency Writer of the Year in the 2018 ADVFN International Awards.