The Fed must 'quickly regain control' after missing the mark on inflation as rising prices have yet to peak, says Mohamed El-Erian

The Fed must 'quickly regain control' after missing the mark on inflation as rising prices have yet to peak, says Mohamed El-Erian
Mohamed El-Erian, chief economic adviser of Allianz.Rob Kim/Getty Images
  • High inflation is here to stay for the next few months, economist Mohamed El-Erian said on 'Face the Nation'.
  • Fed policy makers should "ease their foot off the accelerator" of emergency stimulus measures, he said.

The Federal Reserve this week needs to start gaining back its credibility in its approach to inflation as it's likely that it sticks around the nearly 40-year high notched in November, Mohamed El-Erian, chief economic adviser at Allianz, said Sunday on CBS's "Face the Nation".

The Federal Reserve will hold its last meeting of 2021 starting Tuesday and ending with a policy announcement on Wednesday. El-Erian, on CBS's Sunday morning show, reiterated his view that the Fed's characterization of inflation as transitory is "probably the worst inflation call" in the central bank's history. It isn't the first time the famed economist has voiced that opinion.

El-Erian said there's a high probability of the Fed making a policy mistake in its calling hot consumer prices transitory, a term that Fed Chairman Jerome Powell backed off late last month. Transitory inflation suggests consumer prices increases are not structural and therefore will climb on a temporary basis.

"So, the Fed must quickly, starting this week regain control of the inflation narrative and regain its own credibility. Otherwise, it will become a driver of higher inflation expectations that feed onto themselves," El-Erian said.

Annual inflation rose to 6.8% in November. The reading from the Bureau of Labor Statistics marked the fastest pace of price growth since 1982, led by increases in gasoline, shelter, food, and vehicles. Inflation has been marching higher as the US economy continues to recover from the ongoing coronavirus pandemic.


El-Erian didn't advocate for the Fed to tame inflation by abruptly ending its economic stimulative measures which include last year's pulling down the fed funds rate to an ultra-low level between zero and 0.25%. Such a move would risk throwing the world's largest economy back into recession.

"What they need to do now, Margaret, is ease their foot off the accelerator," El-Erian told "Face the Nation" host Margaret Brennan. "There is no reason why they should be injecting so much liquidity," he said. "There is no reason why they should be boosting the housing market at a time when house prices are pricing Americans out of buying homes. They should ease their foot off the accelerator in order to avoid slamming on the brakes later on."

The Fed had said it would begin reducing its emergency economic support measures in November. It planned to reduce its Treasury purchases by $10 billion a month from $80 billion and its purchases of mortgage-backed securities by $5 billion from $40 billion a month.

El-Erian said the country hasn't yet passed peak inflation and that it will be "a few months" before prices start to cool.

The "original" drivers of higher inflation – supply disruptions and labor shortages – are still here but less powerful, he said. "But the driver has planted all these other seeds for other sorts of inflation. And that's not a problem because of what the White House is or is not doing. This is a problem because of what the Federal Reserve is failing to do," he said.