El-Erian Warns ‘Economic Accident’ Would Precede Any Central Bank Pivot

(Bloomberg) — Mohamed El-Erian has given a warning word from the Federal Reserve and other central banks for fears of an end to interest rate hikes.

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“All of you who are looking for a pivot, be careful what you wish for,” Allianz SE chief economic advisor and chairman of Gramercy Funds told Bloomberg Television’s The Open on Friday. “This pivot occurs only when you have a financial accident or a financial accident. And the journey of a financial accident or financial accident is a very painful journey.”

Closely-followed investors and strategists point to the turmoil in markets last week, which the Bank of England intervened to prevent a recession in the gilt after the UK tax cut proposal, as a sign of economic fragility.

“This week has told us a lot about the changes going on,” said El-Arion, who is also president of Queens College, Cambridge, and a Bloomberg Opinion columnist. “The next few weeks are going to be very volatile.”

More than a year ago, El-Erian said the Fed was behind the curve in fighting the sharpest inflation in decades, a prediction that came true when the central bank introduced a rate-hike regime in 2022 that showed no signs of stopping. shows. Financial markets from stocks to bonds have fallen in value this year and liquidity is shrinking to the point where the riskiest deals are now hanging.

“How do you reconcile the need to tighten monetary policy with the need to maintain financial stability?” El-Arian said. “That tension is playing out not only at the domestic level but also at the international level.”

The BoE isn’t the only central bank that has intervened in the markets recently, with the Bank of Japan moving to shore up its currency against a rising dollar.

“These interventions are temporary to be clear,” El-Erian said. “It tells you that the global economy is not clearing up on its own. If it is allowed to clean up on its own, there is going to be a lot of collateral damage. ,

But with global inflation remaining persistent, the Fed and its peers have no choice but to stick with plans to hike rates, at least for now.

“We should be in more pain before we get into a world where central banks say we’re changing our inflation target,” El-Erian said. “There is a justification for changing the inflation target. [But] The reliability shock will be significant. ,

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