March 31, 2023

  • The Fed raised interest rates by 75 basis points on Wednesday, marking its third consecutive rate hike.
  • This signals further growth in controlling inflation, but the move risks tipping the economy into recession.
  • El-Erian said higher, faster growth and higher recession risks could have been avoided.

Higher interest rates that rise faster and last longer, as well as the higher risk of an economic recession, could have been avoided if the Federal Reserve had acted quickly to control inflation, top economist Mohamed El-Erian said Wednesday.

Such comments came after that Fed Wednesday raised interest rates for the third time by 0.75 percentage points to control rising prices. Higher interest rates discourage borrowing, thus cooling demand throughout the economy, but this move risks slowing growth so that the economy could slide into recession.

“Rates that go higher, faster and stay there longer” and the higher risk of a recession could have been avoided if the Fed had responded in time to cool inflation, El-Erian wrote in a tweet Wednesday after the announcement of the Fed’s rate decision.

Fed Having already raised rates five times this year, larger hikes have been accelerating for months as it races to tame inflation, which hit a 40-year high of 9.1% in June. Inflation cooled in subsequent months, but was still high at 8.3% in August.

“Instead of leading the markets in the fight against inflation, the Fed has been forced to follow them,” El-Erian wrote separately. Opinion piece for CNN This information was released on Wednesday before the announcement of interest rates by the central bank. “Yet, because it is so late to react, the Fed will aggressively hike the weak domestic and global economy.”

The situation has caused many to lose confidence in the central bank, and there is a risk that politicians, companies and households may think of the Fed as “part of the problem and not part of the solution,” added El-Erian, who is chief adviser to Allianz and president of Queen’s College at the University of Cambridge in the UK. He was previously the CEO of US bond-fund giant Pimco.

“A growing number of economists are warning that the Fed will lead the United States into recession; and a growing number of foreign policy makers are complaining that the world’s most powerful and systemically important central bank is pulling the rug out from under an already fragile global economy,” he wrote on CNN.

Jerome Powell, the current Fed chair, admitted at a congressional hearing in March that the central bank should have acted earlier.

“Hindsight says we should have moved earlier,” Powell said, per Bloomberg. “The supply side is taking longer to heal than we thought.”

Last month, Powell warned that cooling inflation “will bring some pain to families and businesses.”

The Fed did not respond to Insider’s requests for comment sent outside regular business hours.

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