Economist Warns Fed Can’t Meet Inflation Target Without ‘Crushing’ U.S. Economy

Economist Mohamed El-Erian, chief economic adviser to Allianz and chairman of Gramercy Funds Management, warned that the Federal Reserve cannot meet its 2% inflation target without crushing the U.S. economy. “You need a higher stable inflation rate. Call it 3% to 4%.“, the economist suggested.

Fed could crush U.S. economy, economist warns

Economist Mohamed El-Erian warned Friday that the Federal Reserve cannot meet its 2% inflation target without “crush the economy“. El-Erian is president of Queens College, Cambridge University, and chairman of Gramercy Funds Management. He is also chief economic advisor to Allianz, the parent company of PIMCO, one of the world’s largest investment managers.

“You need a higher steady rate of inflation. Let’s say 3 to 4 percent,” the economist stressed in an interview with Bloomberg Television. He stressed:

I don’t think they can get the CPI down to 2 percent without crushing the economy, but that’s because 2 percent is not the right target.

El-Erian’s comments follow the consumer price index (CPI) data released Tuesday by the government. On a monthly basis, prices rose by 0.5% in January, the highest increase since October. On an annual basis, consumer prices rose 6.4% in January, up from 6.5% in December. Following the CPI report, several Fed officials said the U.S. central bank may have to raise interest rates beyond initial expectations to ease ongoing price pressures.

Allianz’s economic advisor explained that there are several factors that necessitate a higher inflation target. These include supply side developments, including the energy transition, changing supply chains during the pandemic, a tight labor market and changing geopolitical issues.

El-Erian stated that the Federal Reserve is “too dependent on data“. Noting that “c’is a good thing to consider the data, but we need to have a vision of where we are going“He warned that the current problem is that the Fed is stuck in the pursuit of an elusive 2% target. In January, El-Erian predicted that inflation could become “sticky” around the 4% range.

The economist has previously warned that the Federal Reserve could lose credibility if it changes the inflation target. He stated:

You can’t change an inflation target when you’ve missed it so badly.