Mohamed El-Erian says the Fed's credibility is at stake as financial accidents spread

Published Wed, Mar 15 202310:42 AM EDTUpdated Wed, Mar 15 20231:25 PM EDT

The Federal Reserve failed to slow down its aggressive rate hikes in time, and now as a series of bank crises mount, the central bank's credibility is on the line, said economist Mohamed El-Erian. The Allianz and Gramercy advisor said he sees the recent crisis in the banking sector as a confluence of three distinct factors. "One is a set of bank management issues and lapses in supervision," El-Erian said on CNBC's "Squawk Box" Wednesday. "Then, stepping back, we're recognizing that both the private sector and the public sector haven't adjusted enough to what has been a mishandled change in monetary policy regimes." He said the third element is that the Fed's "flip-flopping" between higher and lower interest rate hikes has contributed to the recent market instability. "The flip-flopping of the Fed most recently added interest rate volatility to a situation that already had economic and financial fluidity ... and the equity market is realizing what the bond market has realized for the last few days, [which] is that it is not just one or two institutions. What we saw in one or two institutions is exposing something much bigger that we have to reprise to including that banking is changing because of what's happening right now," El-Erian said. His comments come as the U.S.-traded shares of Credit Suisse sank to an all-time low in trading Wednesday . The massive sell-off comes after the Swiss bank, already embattled by a series of regulatory scandals, said its largest investor, Saudi National Bank, could not provide it with any further financial assistance. This news renewed the rout in U.S. bank stocks that began last week with troubles at Silicon Valley Bank and Signature Bank. As the Federal Reserve continues to digest new economic data indicating where it stands on the fight against inflation, El-Erian sees the institution's credibility at stake after it "didn't slow down in time [and] slammed on the brakes." "What this Fed has failed to do is to step back and take an overall view. It is captive to an outdated monetary framework," El-Erian said. "We've had what I regard as [a] financial-sector capture of monetary policy over the last few years, and that's why we're in this mess."