A coming recession won't be as bad as 2008 if the Fed can avoid further policy mistakes, Mohamed El-Erian says
- A potential recession wouldn't be as bad as 2008, Mohamed El-Erian said Thursday.
- However, the Fed needs to avoid making any further policy errors, the economist said.
Any recession on the horizon wouldn't be as severe as the 2008 crash as long as the Federal Reserve can avoid further policy mistakes and the US takes necessary steps to avoid a steep downturn, according to economist Mohamed El-Erian.
El-Erian has been a vocal critic of the Fed for waiting too long to bring the hammer down on inflation. The delayed response is one of the reasons why inflation climbed to a 41-year high this summer, El-Erian says, and now has central bankers scrambling to put out the fire with aggressive rate hikes.
That's put the odds of a recession to be "uncomfortably high," El-Erian and other economists have warned. But, an incoming downturn likely wouldn't be as severe as the Great Recession, El-Erian said, which whacked the economy with a 10% unemployment rate at its peak.
"[A recession similar to 2008] should not be the case — unless we make more policy mistakes," he said in an interview with New York Magazine on Thursday, pointing to the strength of the US economy.
The labor market remained hot amid aggressive monetary tightening this year, which is a natural barrier to any potential recession. US companies are also benefitting from strong balance sheets, and the country's economy is still highly competitive on the global stage.
However, there are still things that could be done, or done better, if the US is to avoid a harsh recession.
"We have four things we can do to make this a very short and shallow recession," he added, pointing to protective measures on the population as well as implementing some policy and labor market reforms. He says things that can be done in the US include:
- The Fed improving its understanding of the economy and its policies.
- Implementation of better protection for the most economically vulnerable in the population.
- Implementation of structural reforms to boost productivity and human capital in the labor market.
- Closely monitoring financial stability of non-bank institutions.
Some of this would go toward helping the Fed restore credibility, which El-Erian says was lost when the central bank insisting that inflation was just transitory. He pointed to the intense scrutiny of Fed policy this year, even by former Fed officials.
"I've never seen a central bank issue projections every quarter and former Fed officials say they are unrealistic and dismiss them. And people who worry most about hard landings will tell you that because the Fed looks at lagging data, it doesn't realize how quickly the economy slows," he said.
El-Erian previously warned of long-term inflation expectations getting entrenched in the economy, which would be costly for the Fed to unwind. That means the biggest policy error the central bank could make now is ending rate hikes too soon, he added.
"I don't think they can stop now. Because their credibility is so damaged that if they were to stop now, people immediately say, 'This is the Federal Reserve of the 1970s. This is the flip-flopping Fed, and we will have prolonged stagflation,'" he warned. "I'll tell you that the consequences of that are worse than the consequences of the Fed continuing."
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