Transitory inflation could mean higher prices for years, not months, and Powell's stance could complicate his future as Fed chief, Mohamed El-Erian says

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Transitory inflation could mean higher prices for years, not months, and Powell's stance could complicate his future as Fed chief, Mohamed El-Erian says
Mohamed El-Erian Reuters/Lucy Nicholson
  • Transitory inflation could mean higher prices for years not months, Mohamed El-Erian told CNBC.
  • Jerome Powell's steadfast outlook could complicate his future as central bank chief, El-Erian added.
  • "The whole notion of transitory becomes meaningless at this point," he said.

Transitory inflation could mean higher prices for years to come and Federal Reserve Chair Jerome Powell's steadfast stance on the matter could complicate his future as the chief of the US central bank, Mohamed El-Erian said on Monday.

"The minute the Fed starts saying transitory is not just a few months or a few quarters, it could be one to two years," El-Erian told CNBC on Monday. "The whole notion of transitory becomes meaningless at this point. The risk we have is that inflation would get embedded into the system."

El-Erian, who is the president of Queens' College, Cambridge University, also discussed Powell's future prospect as Fed chief given his longstanding narrative that inflationary pressures are temporary.

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"What Chair Powell has done is he has pinned himself over and over again to the transitory inflation core. It has become a conviction- an absolute conviction - and he keeps on repeating it," El-Erian told CNBC. "The risk he faces is that his appointment process may be complicated.

El-Erian however clarified that Powell may very well be appointed a second term in February before the US economy sees whether inflation is truly transitory or not.

On Friday, Federal Reserve Governor Lael Brainard, considered a leading Fed chief candidate next to Powell, said she's "much more willing" to use regulatory tools during a speech before the Aspen Economic Strategy Group, Bloomberg reported.

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However, Brainard did agree with Powell's view of monetary policy and how much the Fed still needs the jobs market to improve before tapering asset purchases, Bloomberg reported.

El-Erian said he's had an "interesting compare and contrast between Chair Powell and Governor Brainard," following the latter's Friday speech. He did not clarify who he had the discussion with.

"It didn't come on monetary policy," told CNBC. "It came on elevated asset crisis and it came on digital currency. So it's interesting to see that we are starting to see more of a race than we had before."

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The Allianz and Gramercy advisor once again pointed people's lack of understanding of what inflation is and how it is already spreading throughout the economy.

"Those of us who lived through inflationary period are seeing what I called a cost-push and a demand-pull inflation coming in," he told CNBC. "I want to clear: I don't think stagflation is a destination for the US economy, it may be part of the journey if we're not careful."

The central bank slashed rates to historic lows at the start of the pandemic to stimulate economic activity and has signaled its intention to keep interest rates unchanged until 2023.

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