(See - Sada Elbalad English) - A recession in the US isn't "a foregone conclusion" thanks to the resilience of the credit and labor market, while Wall Street has factored in a really high degree of interest rate risk, according to Mohamed El-Erian, chief economic adviser at Allianz.
While the US Federal Reserve faces an even tougher challenge than under Paul Volcker, El-Erian says the US central bank could avoid the economic crisis in its anti-inflation campaign — even though the monetary policy challenges appear daunting.
"The risk of a recession in the United States is uncomfortably high, and I don't think it's a foregone conclusion. I don't think the probability is 100 percent," Gramercy's fund chief said on Bloomberg TV's "The Open" on Tuesday. Hopefully, the Fed can still find a way to avoid it."
Triple Dilemma
Volcker is credited with controlling inflation in the early 1980s by raising interest rates to nearly 20%. El-Erian believes that this time Federal Reserve Chairman Jerome Powell should consider the turmoil in the financial system while the bank seeks to "borrow credibility" from the Fed under Volcker's leadership to justify not adopting an equally hawkish policy when making its decisions.
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El-Erian added that "the problem that Powell faced and that Volcker did not have to face is a triple dilemma. Volcker was dealing with growth and inflation. While President Powell is also facing the issue of financial stability." If the Fed abandons its current austerity policy, "it will be because of maintaining financial stability. It will not be because it has decided not to care about inflation any more."
Stagflation
El-Erian explained, “The risk here is that we fall into a quagmire of stagflation as we try to counter and mitigate the risks of financial instability. Which happens when you start late – you have less space for movement.”
Earlier this week, El-Erian noted that the speed with which the Federal Reserve raised interest rates could cause economic and financial damage. The central bank has raised basic interest rates five times since last March, and expectations are that it will increase by 75 basis points for the fourth time in a row next month, with investors betting on increasing it to the same level in December or to a lesser extent.
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El-Erian said, "The labor market is still strong, but it requires a highly skilled central bank and more luck because it has no time."
By Taarek Refaat
October 26, 2022
