(The Bharat Express News) - The Fed was heavily criticized last year for its delayed response to inflation, stepping in to raise interest rates when annual inflation was already at 7.9%. Many critics took aim at Fed Chairman Jerome Powell, who, along with several other top officials, had said in 2021 that rising prices were only temporary.
One of Powell’s most ardent opponents is Mohamed El-Erian, an economist and president of Queens’ College, Cambridge. El-Erian’s final piece of advice to Powell is about optics and how to keep a bad situation from getting worse.
“The least bad option now is to delay rate hikes and be honest with the market about where rates are headed. The Fed must continue to communicate consistently,” El-Erian said in an interview with from Baron published Thursday.
El-Erian, a longtime speaker of how high interest rates threaten to hurt markets, said in the interview that the stock market has been extremely jittery and Powell’s public comments are sending markets into a spiral.
El-Erian says Powell is “not sticking to the script” and it is causing economic damage. When asked what advice he would give Powell, El-Erian quoted lyrics from the Broadway musical Hamilton: “Do you know that rule from Hamilton? Talk less, laugh more.”
A matter of word choice
It is not the first time that El-Erian has criticized the Fed’s reporting. Last month, he blasted Powell in a Bloomberg op-ed for making gloomy statements that “fuelled significant volatility in markets that could jeopardize both economic well-being and financial stability.” said El-Erian in his from Baron interview that Powell’s press appearances are normally followed by periods of market volatility far worse than those of his predecessors. The enormous power that Powell’s words have over the market was charted in a paper published last month by VoxEU of the Center for Economic Policy Research, a European non-profit organisation. The paper found that Powell’s press conferences have played an “outsized role in shaping recent market expectations,” leading to volatility at least three times that of other Fed chairpersons, while Powell’s specific choice of words “systematically linked”. to market reversals.
For the past year, Powell has avoided saying he would delay or reverse interest rate hikes anytime soon, which could do more harm than good.
Last month, Powell moderated his tone after multiple bank failures threatened to unleash a financial crisis. Meanwhile, Neel Kashkari, chairman of the Minneapolis Fed, warned in March that while banks are generally well-capitalized, the crisis is certainly moving us closer to recession.
Powell has said the bank failures could still cause banks to cut lending, but also indicated that there could be a silver lining in that the Fed may no longer need to raise rates as quickly and may even raise rates sometime this year. increases can be interrupted. One hopeful sign is that the rate hike the Fed approved in March was lower than what some analysts had predicted before the banking crisis began.
In a Project Syndicate op-ed published Monday, El-Erian reiterated his point about the Fed’s poor communication, writing that its reporting “inflamed rather than calmed market volatility on several occasions.”
Reconciling the Fed’s mandate to curb inflation with what investors say about rate hikes in the coming months will be key to determining Powell’s legacy, El-Erian said in his interview. While it may not be an easy path for the Fed to navigate, it will be worth it in the long run, he said.
“The bad news is that we are on a bumpy journey. The good news is that it’s a bumpy journey to a better destination,” said El-Erian.
This story was originally on Fortune.com.
