The Fed must do two things to re-establish credibility, Allianz's El-Erian says
Although it has now established more consistent messaging to the market, the U.S. Federal Reserve needs to do two more things to re-establish its credibility, according to Mohamed El-Erian, chief economic advisor to Allianz.
Fed Chairman Jerome Powell struck a hawkish tone during his speech at the Jackson Hole economic symposium last week, reinforcing the central bank's commitment to aggressive monetary policy tightening in order to rein in inflation, and warning that the U.S. economy will face «some pain» in the process.
Prior to establishing a firm message in recent months — with inflation running at a 40-year high — Powell and other Fed officials had struggled to guide markets effectively, after accepting fault for inaccurate projections throughout 2021 that inflation would be «transitory.»
«The more Fed officials repeat it, the more the market is pricing it in, but it's mainly the fixed income markets so far that have priced it in,» El-Erian told CNBC's Steve Sedgwick at the Ambrosetti Forum on Friday.
«Other markets are hoping somehow that we are in a cyclical moment, not in what I think is more secular and strategic.»
El-Erian gave the Fed credit for establishing a clear and consistent message, but said it would need to do two more things in order to give its forward guidance credibility from here on out.
«One is to explain to the marketplace why it got its analysis so wrong and what has it done about its forecasting abilities,» he said.
«And secondly, change its framework. Remember, we still have a framework that is for a world of deficient aggregate demand and we're in a world of deficient aggregate supply.»
El-Erian added that the current framework has been geared toward an environment in which inflation has
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