El-Erian says the Fed is dragging the U.S. into an unnecessary recession

Published Wed, Mar 8 202310:07 AM ESTUpdated Wed, Mar 8 202310:57 AM EST

The Federal Reserve "flip-flopping" on monetary policy is threatening to send the U.S. economy into a recession, economist Mohamed El-Erian said Wednesday. "We're going to have a recession made at the Fed," El-Erian told CNBC during a " Squawk Box " interview. "There's no reason the U.S. economy should go into recession other than a Fed policy mistake." Those comments came a day after Fed Chairman Jerome Powell told a Senate committee that if inflation data stays hot, the central bank likely will raise rates more than it had expected and at a faster pace. Prior to that, Powell's recent remarks had indicated that he was seeing signs of disinflation in the economy and had hopes that the Fed could at least hold the size of its future rate hikes to 0.25 percentage point, or 25 basis points. "Let's not have a new layer of policy-induced volatility on top of things. But that's what we are getting," said El-Erian, chief economic advisor at Allianz. "It's a flip-flopping of policy guidance." Markets recoiled following Powell's remarks Tuesday, with sharp sell-offs in both the equity and bond markets. Stocks remained in a holding pattern Wednesday. On top of that, traders repriced their expectations for rate hikes ahead. Pricing shifted to a strong likelihood of a 50-basis point increase at this month's Federal Open Market Committee meeting while adding another quarter point to the likely peak, or terminal, rate before the central bank stops tightening. The yield curve also is pointing strongly to a recession, with the inversion between the 2- and 10-year Treasury notes most recently at 106 basis points. Such inversions have always foreshadowed recessions. El-Erian said much of the economic anxiety can be laid at the feet of Fed officials, who he said should have held to their more aggressive hikes rather than the 25 basis point increase approved Feb. 1. "If you stay at 25, you fall further behind on the inflation front," he said. "It's a hole that they dug for themselves, and they keep on digging."

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