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Mohamed A. El-Erian
Says More…

This week in Say More, PS talks with Mohamed A. El-Erian, President of Queens’ College at the University of Cambridge, a professor at the University of Pennsylvania’s Wharton School, and the author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

Project Syndicate: Since last year, you have called the US Federal Reserve’s handling of inflation “an error that will likely be remembered as one of its biggest ever.” The Fed has recently embraced a more aggressive approach, with Fed Chair Jerome Powell signaling support for a far steeper trajectory for interest-rate hikes in the coming months. Are policymakers on the right track, and can they restore price stability without triggering a recession?

Mohamed A. El-Erian: While policymakers are finally adjusting, the impact and implications of the overall policy mistake I first identified last summer have been growing bigger and broader. The delay in adopting an appropriate policy response has reduced the probability of a “soft landing” or even what Powell recently called a “softish landing.” Instead, Fed officials are increasingly being forced to choose between two unappealing options: either they can hit the policy brakes hard to contain inflationary expectations, and risk pushing the economy into recession, or they can tap the brakes on and off, and risk allowing the inflation-related problems to persist well into 2023.

PS: Soon after Russia’s invasion of Ukraine, you described the war’s “multifaceted economic fallout,” from supply-chain disruptions to surging commodity prices. Absent a timely policy response, you warned, the advanced economies should expect “lower growth, worsening inequality, and wider performance discrepancies among countries.” What are the pillars of such a response in the United States?

MAE: Unfortunately, this scenario has been playing out just as I feared it would, with particularly acute consequences for the most vulnerable segments of the population and for fragile developing countries. Stagflation has moved from a risk scenario to more of a baseline. Recession is now a material risk. Inequality is rising. The global economy is facing more powerful fragmentation pressures. And all this exacerbates the immediate challenges to livelihoods, as well as the big secular challenges such as climate change.

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