Federal Reserve Chair Jerome Powell’s acknowledgement on Tuesday of virulent U.S. inflation may amount to too little, too late, says the renowned economist Mohamed El-Erian,
“By retiring the word ‘transitory,’ [on Tuesday] Powell did more than finally correct a gross mischaracterization of inflation that he was wedded to for way too long,” El-Erian wrote on Bloomberg.
“He also put the spotlight on inflation as a major risk to the economy and financial markets — not because the prospects for further price increases are inherently problematic (they aren't), but because the Fed’s communication process and policy responses have been lagging realities.
“The catch-up process – and a rapid one is required given the delays so far – could destabilize markets and the economy. It didn’t have to be this way.”
Consumer prices leaped 6.2% in the 12 months through October, the highest annual inflation rate in more than 30 years.
Until Tuesday, the Fed had planned to gradually taper its monthly bond purchases before ending them in the middle of next year.
But Powell said Tuesday that the central bank may have to pick up the tapering pace.
So what’s the biggest danger here?
“The problem now is that such a late wake-up to the reality of inflation [from the Fed] increases the risks of mismanaging its policy catch-up process, exposing the economy to a higher risk of an unnecessary, Fed-induced slowdown,” El-Erian said.
Prior to the emergence of the omicron Covid variant, some economists predicted GDP growth of 4% to 5% for next year. GDP expanded 2.1% in the third quarter.