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The Fed could 'crush' the US economy by pursing its inflation target too quickly, Mohamed El-Erian warns

Markets Insider 5/22/2023 (Zinya Salfiti)
Top economist Mohamed El-Erian. REUTERS/Lucy Nicholson © REUTERS/Lucy Nicholson Top economist Mohamed El-Erian. REUTERS/Lucy Nicholson
  • Mohamed El-Erian warned the Fed could crush the US economy by trying to quickly cut inflation to 2%.
  • But a "credibility-damaged Fed" can't talk about any alternatives, the top economist said.
  • While inflation has cooled, it still stood at almost 5% in April.

The Federal Reserve could crush the US economy if it fights to bring inflation down quickly to its target of 2%, according to top economist Mohamed El-Erian.

He tweeted on Saturday that "getting to 2% quickly would risk unnecessarily crushing the economy" but added the "credibility-damaged Fed" would struggle to adopt an alternative target.

He said the Fed "steadfastly pursuing" the target was "inappropriate for a world of deficient aggregate supply."

The Fed raised interest rates for the 10th time in a row this month – from near-zero last March to upward of 5% today. Inflation has cooled but still stood at 4.93% in April.

El-Erian's tweet was in response to a Bloomberg article about how a string of Wall Street asset managers don't think the Fed can meet 2%, including BlackRock, Bank of America and others who are warning that inflation will remain higher for longer. 

El-Erian, who is the chief economic adviser at Allianz, has previously said that, under the leadership of Fed chair Jerome Powell, the Fed is in danger of being remembered "as the Fed that undermined its own credibility, its political autonomy, and America's crucial anchoring role at the center of the global economy."

He has also repeatedly criticized the central bank of dismissing the 2021-2022 inflation rise as "transitory," only to then be forced into a series of sharp interest-rate rises last year as consumer prices surged at the fastest pace in four decades.

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