Economist Warns Fed Can’t Hit Inflation Target Without ‘Crushing’ US Economy

Economist Mohamed El-Erian, Allianz’s chief economic adviser and chairman of Gramercy Funds Management, has warned that the Federal Reserve cannot meet its 2% inflation target without crushing the US economy. “You need higher stable inflation. Call it 3% to 4%,’ suggested the economist.

The Fed could destroy the US economy, the economist warns

Economist Mohamed El-Erian warned Friday that the Federal Reserve cannot meet its 2% inflation target without “crushing the economy.” El-Erian is president of Queens’ College, Cambridge University, and president of Gramercy Funds Management. He is also chief economic advisor to Allianz, the parent company of PIMCO, one of the largest asset managers.

“You need higher stable inflation. Call it 3% to 4%,” the economist stressed in an interview with Bloomberg Television. He emphasized:

I don’t think they can get the CPI to 2% without crushing the economy, but that’s because 2% is not the right target.

El-Erian’s comments followed the government’s consumer price index (CPI) data released on Tuesday. On a monthly basis, prices rose 0.5% in January, the highest level since October. On an annual basis, consumer prices rose by 6.4% in January, compared to 6.5% in December. Following the CPI report, several Fed officials said the US central bank should raise interest rates above initial expectations to dampen ongoing price pressures.

Allianz’s economic adviser explained that there are several factors that necessitate higher target inflation. These include supply-side developments, including an energy transition, the change in supply chains during the pandemic, a tight labor market and shifting geopolitical issues.

El-Erian said the Federal Reserve is “too data-dependent.” Noting that “it’s correct to account for data, but you have to have a picture of where you’re going,” he warned that the problem now is that the Fed is stuck chasing an elusive 2% target. In January, El-Erian predicted inflation could become “sticky” at around 4%.

The economist previously warned that the Federal Reserve could lose credibility if it changes its inflation target. He opined:

You can’t change an inflation target if you’ve missed it this far.

Do you agree with the economist that the Fed cannot meet its 2% inflation target without crushing the US economy? Let us know in the comments below.

Kevin Helms

Austrian economics student Kevin found Bitcoin in 2011 and has been an evangelist ever since. His interests are in Bitcoin security, open source systems, network effects and the intersection between economics and cryptography.