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- Top economist Mohamed El-Erian warned it is "uncomfortably possible" the Fed will tip the US into a recession.
- "The Fed didn't recognize it had an inflation problem and didn't respond fast enough," El-Erian said.
- Despite recession fears, he expressed some optimism around the strength of its labor market.
As recession alarms pile up in recent weeks, top economist Mohamed El-Erian warned Friday that he was skeptical the Federal Reserve would be able to pull off the soft-landing it has been aiming for.
"It is, unfortunately, uncomfortably possible that the Fed is going to slam on the brakes and push us into recession," El-Erian said in an interview with Yahoo Finance, attributing the muddy outcome to a "series of Federal Reserve mistakes."
El-Erian has been a vocal critic of the central bank's slow response to inflation. Earlier this week, he warned that inflation could tick up to a record 9%, and that soaring prices could have been tackled earlier if the Fed had been quicker to react.
As of May, inflation was running at 8.6%, according to the Bureau of Labor Statistics. It's the highest prices have been since 1981, when the U.S. last found itself in a period of high inflation and low growth.
In stepping up its fight against inflation, the Fed raised interest rates by 75 points last Wednesday, the steepest hike since 1994. But for El-Erian, that move came too late: "The Fed didn't recognize it had an inflation problem and didn't respond fast enough. And in the process, it has lost credibility," he said.
The loss of that credibility has caused the public to doubt the Fed's projections, El-Erian said, noting dramatic swings in US Treasury yields. Earlier in June, the Treasury yield curve inverted, a notorious alarm for a looming recession.
The two-year Treasury yield, a short-term rate that El-Erian said the Fed has the most control over, also increased 30 basis points to 3.346% in June. That rate is highest since 2007, around the onset of the Great Recession.
"Instead of the Fed leading the marketplace, the marketplace is dragging the Fed along," he warned.
Despite concerns of an imminent downturn, El-Erian expressed some optimism for the US in the strength of its labor market. While Americans have been reigning in spending in response to inflation, the country currently boasts over 10 million job openings, which could signal that spending will eventually resume.
He acknowledged though that the outcome would largely lie in how much trust Americans had in the Federal Reserve.
"The more people worry about a slowdown, the more they'll start pulling back on spending," he said.
source https://markets.businessinsider.com/news/bonds/recession-outlook-federal-reserve-inflation-risk-mohamed-el-erian-2022-6