El-Erian says the Fed should go back to raising interest rates more aggressively

Published Thu, Mar 2 20239:43 AM ESTUpdated Thu, Mar 2 202312:18 PM EST

The Federal Reserve faces two policy choices when it meets later this month, neither of which is particularly appealing, economist Mohamed El-Erian said Thursday. Markets expect the central bank to hike its benchmark interest rate another 0.25 percentage point when it next meets on March 21-22. But they also are making room for the possibility of a 0.50-point increase, an alternative El-Erian thinks is preferable, though not ideal. "If they are truly data-dependent, then they should go back to 50" basis points, El-Erian, the Allianz chief economic advisor, said on CNBC's " Squawk Box ." However, should they do so, "You do two things. You undermine your forward policy guidance, and you undermine the narrative of disinflation." At its last meeting , which concluded Feb. 1, the Fed stepped down the level of what had been aggressive hikes to a quarter point, or 25 basis points, and indicated that likely would be the path forward. However, inflation data lately has raised concerns the Fed is falling behind with the smaller increases. Several Fed officials have recently suggested that going back to a 50-basis point move is on the table for this month's meeting. A basis point is equal to 0.01 percentage point. As of Thursday morning, market pricing showed a 69% probability of a quarter-point move and a 31% chance of a half-point increase, according to CME Group data . Both moves present problems for the central bank, El-Erian said. `Unintended consequences' "If you stick to 25 and go higher for longer, which is the alternative, you risk hiking into a slowing economy and you undermine your credibility even more," he said. "It's the tragedy of the second-best. The further you are away from the right policy response, which they fell behind on, the more that whatever you do has collateral damage and unintended consequences." The Fed's benchmark funds rate is now in a targeted range between 4.5%-4.75%%. Futures trading Thursday morning indicated expectations for the rate to go to 5.59% by autumn of this year before edging lower. El-Erian said recent moves in the bond market, specifically soaring Treasury yields, are coming from investors worried that "we may end up having the Fed tip us into a recession that is totally unnecessary." The curve between the 10-year and 2-year yield is now at its steepest inversion in more than 40 years. An inverted yield curve has preceded every recession since at least the early 1980s.