“The Fed must be careful, because it risks losing credibility on inflation.” Mohamed El-Erian, president of Queens’ College Cambridge and chief economic advisor to Allianz, doesn’t mince words. The economist speaks on the eve of the symposium organized by the Federal Reserve of Kansas City in Jackson Hole, Wyoming: tomorrow the president of the US central bank, Jerome Powell, is called to provide answers to questions from investors and savers. Delta variant, inflation and scarcity of raw materials are of concern. Above all, to give indications on the strategy.
How do you get to Jackson Hole and what are the expectations?
“I expect discussions about the various challenges economies face due to the uneven nature of growth and what this means – and doesn’t mean – for central bank policies. And debates on the near-term outlook for major economies, particularly the United States. Instead, as much as I think it should, I don’t expect Powell to give concrete details on how and when the Fed will reduce its massive asset purchases and what that will mean for the medium-term path of interest rates.
Is inflation a threat?
«The Fed continues to assure us that it is transitory. I’m not so sure. In fact, I’m pretty worried. Both the top-down macro data and the more micro bottom-up indications of companies point to significant inflationary pressures on the way. And this is due both to the “push in costs”, also due to bottlenecks in the supply and shortage of manpower, and to the “traction of demand” given the recent push to household incomes. This does not mean a return to the high inflation of the 1970s. But it does mean a higher and more persistent inflation rate than what the economic system and markets are currently programmed for. Furthermore, it also threatens the credibility of the Fed and increases the risk that it will lag behind macro developments and press the brake afterwards ».
Powell’s term expires next year. Do you see a reshuffle?
“It is almost certain that there will be changes, especially at the level of the two vice presidents of the Fed. Conversely, most people are expecting Powell’s renewal. If not, Governor Lael Brainard is a very strong and credible contender given his experience at the Fed and the Treasury, as well as his solid economic foundation, both theoretical and empirical. “
The latest minutes of the Fed meeting show that most voting members agree that we need to start reducing pandemic stimuli sooner rather than later. Right choice?
“Yup. I think the Fed should have taken advantage of the favorable window a few months ago and started tapering already. For three reasons. First, very few economists, if any, can indicate with a high degree of confidence a favorable impact on growth from current monetary policy. Second, it is important, especially given the threat of inflation, that a less expansive monetary policy makes room for a fiscal effort aimed at greater productivity and growth potential. Finally, the Fed’s heavy and persistent intervention in the markets distorted the functioning of the market itself and encouraged excessive risk-taking ”.
And the ECB? Will the path be simultaneous?
“Given the situation in Europe, both from an economic and fiscal policy point of view, the ECB is on a slower path than the Fed.”
Is the Delta variant a serious danger?
“Yes, it is a concern and complicates monetary policy, especially for the Fed. This is because the Delta variant has the potential to slow economic growth, especially in the services sector on the one hand, and on the other hand increase inflationary pressures due to a new cycle of supply and transport chain disruptions, as well as further friction in the labor market’s ability to match workers to record job vacancies. ‘