“We have lost the anchor of the economy. I’m worried about a recession in 2024.”
Mohamed El-Erian, a prominent Wall Street economist, and chief economic advisor at Allianz Group, said in a Wall Street Journal (WSJ) podcast interview released on the 8th (local time), “Savings are depleting, credit costs are rising, mortgage costs are increasing, and fiscal resilience is being lost, all of which are eating away at the economy’s recovery.”
El-Erian stated, “While people were discussing a possible recession in 2023, I was holding back. I said we had no reason to fall into a recession because the U.S. economy is fundamentally solid. Now, I’m more worried about 2024.” He cited the lagged effect of massive interest rate hikes, depletion of savings, and increased global uncertainty as reasons for his concern.
When asked what the recent surge in Treasury bond yields tells us, he diagnosed, “It’s saying that we are in chaos.” Contrary to previous interpretations that central banks would aggressively raise interest rates in 2022 and maintain higher rates for a longer period in 2023, El-Erian pointed out, “Now we are worrying about fiscal deficits, bond issuance, and who will buy them.”
El-Erian also criticized the “general perception of the U.S. economy shown over the past 15 months or more” as a more fundamental problem. Despite the U.S. being the largest economy in the world with the most mature system, there is no consensus on economic forecasts. He described the situation as a “surprising sequence” that shifted from a soft landing to a hard landing, then to no landing, back to a hard landing, a crash landing, and finally back to a soft landing. He diagnosed, “This tells us that we have lost our anchor. We have lost the anchor of the economy. We have lost the anchor of policy and technical anchors as well.”
He emphasized the importance of curbing inflation. He stated, “Inflation determines the Federal Reserve’s (Fed) actions. The Fed, as the most important central bank in the world, can make the economy difficult if they repeat policy mistakes.” He also said, “Inflation hits the poor hard. It brings not only economic consequences but also social and political consequences. Without price stability, high growth is also difficult.” He diagnosed that uncontrolled inflation will eventually erode purchasing power and lower consumer and business sentiment.
El-Erian also criticized the Fed for making six major policy mistakes. These included misjudging inflation as transitory, failing to act swiftly in that situation, failing to predict in the same direction, making supervisory mistakes leading to the bankruptcy of small and medium-sized banks, increasing volatility due to communication gaps, and ultimately failing in terms of credibility and responsibility surrounding the Fed.
He mentioned the story of the CEO of the now-bankrupt Silicon Valley Bank (SVB), who told Congress, “I trusted the Fed. I believed that inflation was transitory, as the Fed analyzed,” to emphasize that the Fed has lost trust. He also pointed out that even though the Fed determines the interest rate, the market expects a different path, showing tremendous volatility, which he identified as a trust issue.
When asked if he felt the Fed was doing well now, he said, “It’s in a better position after the huge mistake of calling inflation transitory,” adding, “Fortunately for everyone, the U.S. economy was surprisingly robust and resilient.”
By. Cho Seul Gi
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