Could Stubborn Fed Policies Lead to Recession? El-Erian Thinks So

Allianz Chief Economic Advisor Mohamed El-Erian warned that the U.S. Federal Reserve (Fed) could risk economic recession if it delays interest rate cuts.

In an article contributed to the Financial Times (FT) on June 18, El-Erian criticized the Fed for insisting on delaying rate cuts, arguing that cutting sooner rather than later reduces the risk of recession.

El-Erian emphasized that continual delay increases the risk of triggering a recession by prompting aggressive interest rate cuts later on.

He pointed out a case where the Fed mistakenly did not raise interest rates in 2021, misjudging the inflation caused by the COVID-19 pandemic as temporary.

In response to the sharp rise in inflation, the Fed, which should have aggressively raised interest rates, subsequently increased the rate from zero to 5.25 and 5.5% over 11 instances.

The Fed has been waiting for clearer signs that inflation is falling towards its 2% target.

The Fed has shown caution, fearing that a hasty rate cut could lead to a rebound in inflation and causing stagflation, where prices rise during a recession.

El-Erian stated that the Fed’s anticipated interest rate cut in December is too late and could trigger financial market instability and economic slowdown, particularly affecting vulnerable industries.

While El-Erian argues for an earlier rate cut, senior Fed officials are calling for patience. Susan Collins, President of the Federal Reserve Bank of Boston, stated in an interview with Yahoo Finance that there is a possibility of 1-2 rate cuts later this year and that the Fed needs to be patient. When asked if this meant a possible rate cut in September rather than November or December, she declined to comment.

Federal Reserve Governor Adriana Kugler also weighed in on the expected rate cuts for later this year, while St. Louis Federal Reserve President Alberto Musalem stated it would take significant quarters until the necessary data to decide on cuts are available.

New York Federal Reserve Bank President John Williams and Richmond Federal Reserve Bank President Thomas Barkin both avoided mentioning specific timing for rate cuts in their respective speeches, emphasizing that economic indicators will be important for changes in monetary policy.