to be seen Economic expert, Mohamed El-Erian. Referring to pursuing one goal while being silently pointed in a different direction is an old tactic in politics, underscoring that the US Federal Reserve may now be considering such a deceptive maneuver during 2023.
El-Erian is among the few people who have an intimate knowledge of financial markets or central banks, having held the position of Chief Economic Adviser at Allianz, President of Queen’s College Cambridge and author of numerous books, including the most recent The Only Game in Town: Central Banking, Instability, and Recovery from Another Collapse”.
Until 2014, he was the CEO of giant asset management firm PIMCO, the world’s largest bond manager.
El-Erian wrote in an article for the Financial Times that since 2012 the Fed has publicly and explicitly committed to a 2% inflation target, noting that the 2% target originated in New Zealand in 1990 and was gradually spread to many other developed countries.
He considers the target high enough to allow for the price adjustments needed to reallocate desired resources to the economy, avoiding the zero lower bound trap, emphasizing that, in his view, it is no longer possible to cut interest rates to stimulate the ‘economy.
El-Erian said inflation has long been significantly above the Fed’s target, while the Personal Consumption Expenditure (PCE) price index, his preferred measure of inflation, has fallen in recent years. months, but remains 3x above target.
According to what Al-Erian wrote, viewed by Al-Arabiya.net, “the shift in the inflationary process is also worrying, as energy and food prices no longer dominate it, but the inflation drivers are increasingly coming from sector services.”
american jobs
Within this sector, the latest monthly US jobs data showed wages rose 0.6% in November, doubling consensus expectations and lifting the steadily rising quarterly moving average to 6%.
This exponential wage growth has been accompanied by strong monthly job gains.
Job vacancies remain consistently high, outpacing the number of unemployed by a factor of 1.7 due to declining labor force participation.
Combined with input price inflation falling slower than consensus expectations, there’s reason only the services sector is concerned that inflation could continue to exceed the Fed’s already continuously revised forecasts.
There are others as well, including changing global supply chains and the changing nature of globalization and the energy transition.
Of course, the Fed is still trying to catch up to tame price hikes after last year’s continued aggregate mischaracterization of inflation as “temporary” and its initially timid steps to withdraw monetary stimulus.
core inflation
El-Erian predicted that instead of inflation falling to 2-3% by the end of next year, core inflation of US personal consumption spending is likely to stabilize at around 4% or higher , indicating that this is what happens when an inflationary moment can pass in the economic system.
The world’s most powerful central bank now faces two grim choices in the coming year: crush growth and jobs to meet its 2% target or comply with a higher inflation target and risk a new round of unstable inflationary expectations.
Of course, the adequacy of the 2% inflation target itself is problematic, El-Erian said, adding that it’s not at all clear whether the Fed would choose it if it restarted today.
He explained that a final target of 3-4% is likely to be more likely, given the liquidity on the supply side, the energy transition, the reallocation of resources required and, of course, the experience with zero inflation in the last decade.
Given all of this, El-Erian continued, it might be tempting for the Fed to keep targeting an inflation target of 2%, but in practice they end up pursuing a higher target in the hope that over time the public will accept it as a higher and already stable target.
El-Erian believes this is, of course, far from an optimal approach, as it is difficult to withdraw halfway, as it involves sensitive ethical issues that could raise more questions about the Fed’s accountability, credibility and independence.
financial fragility
However, given the extent of economic uncertainty and financial fragility, the Fed may end up thinking that this less-than-perfect policy approach may be the best course of action.
Al-Arian recalled that a friend of his once told him that an initial string of bad decisions often makes it very difficult to quickly return to the optimal place despite good intentions and efforts to do so.
This is the trap the Fed has fallen into not only because of its policy mistakes in 2021-22 but also because of its overreliance on unconventional policies in the previous decade, he said.
“Unfortunately for all of us, the road from here isn’t going to get much easier any time soon, even if inflation is down,” he added.
