(The Bharat Express News) - The Federal Reserve faces three major obstacles, and the recent banking turmoil is making them more difficult to address, Mohamed El-Erian said.
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Top economist Mohamed El-Erian said the US central bank is facing three major obstacles at once.
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Policy makers navigating a ‘trilemma’ [of] price stability, maximum jobs and also financial stability,” he told Bloomberg TV.
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Meanwhile, a contraction in banking sector lending equates to a contraction of 25-50 basis points.
“This only allows the FBI to navigate this trilemma [of] price stability, maximum jobs and financial stability are much more difficult,” he told Bloomberg Television on Thursday.
After the bankruptcy of Silicon Valley Bank in March, unrest in the banking sector had a sharp effect on the financial markets. Abroad, Credit Suisse was bought out by UBS over concerns about the Swiss lender’s long-term health.
But El-Erian, the chief economic adviser at Allianz, said the banking sector is not suffering from a crisis, but is instead seeing “vibrations”, adding that what many are calling a credit crunch is more like a contraction.
A credit crunch is economy-wide, while a contraction is more unevenly distributed, with small businesses hit harder than large companies, he added.
The credit contraction will have a similar effect on the economy to rate hikes by the Fed, equivalent to about 25 to 50 basis points, El-Erian estimated.
The central bank has been engaged in a monetary tightening campaign for more than a year, raising borrowing costs by 475 basis points to combat decades of high inflation.
According to CME’s FedWatch Tool, markets are widely expecting the Fed to raise rates by another 25 basis points next month and then pause on further hikes, raising the likelihood of rate cuts later in the year.
