The Fed should raise rates by more than markets anticipate in February as inflation will likely be sticky through mid-year, Mohamed El-Erian says

• The Federal Reserve in February should raise interest rates by more than the markets are anticipating, said economist Mohamed El-Erian.
• The Fed should raise its benchmark rate by 50 basis points as inflation is likely to be sticky at 4% by mid-year, he told Bloomberg.

The Federal Reserve should opt for delivering a larger rate hike than markets are expecting at the start of 2023 because inflation may halt its downward trend in the coming months, said economist Mohamed El-Erian.

"I would go personally for 50 [basis points], and that's because I think inflation is going to get sticky in mid-year at around 4%," said El-Erian, chief economic adviser at Allianz, to Bloomberg in an interview broadcast on Friday.

"I'd rather get the tightening out of the way now than when the economy weakens, but it's tough. It's a personal judgment. I'd go for 50."

Investors are largely looking for the Federal Open Market Committee to raise the Fed funds rate by 25 basis points on February 1. The CME FedWatch tool on Monday showed a 99.8% probability of a rate increase of a quarter-percentage point at the first meeting of 2023.

The Fed in December downshifted its pace of rate hikes to 50 basis points from 75 basis points after economic data showed inflation easing from multiyear highs. The Fed funds rate currently stands at 4.25%-4.5%.

El-Erian said there are arguments both for and against the Fed moving to 25 basis points, making the February meeting a "tricky one" for policymakers led by Chairman Jerome Powell.

"If you want to go to the 25 camp, you look at the retail sales numbers, you look at the [yield] curve inversion. The 50, you look at the labor market, and there are downside risks to both."

El-Erian said the Federal Reserve is still facing a credibility issue as the market's pricing is at odds with the Fed's larger message that it still has plenty of work to do to get inflation to its 2% target.

The Consumer Price Index was up 6.5% year over year in December, down from November's 7.1% rate. But core prices rose by more than expected as shelter costs for homeowners and renters increased.

"The ultimate destination itself is a variable," in terms of how high the Fed will raise its benchmark borrowing rates, the economist said. He also said he doesn't think it's a good idea for the Fed to take a higher-for-longer approach in fighting inflation.

"If you look at the two-sided widths of that approach, I think it tails too much on the downside," said El-Erian, who also serves as president of Queens' College at the University of Cambridge.