El-Erian Says Fed Made "Worst Inflation Call Ever"

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by Tyler Durden
Sunday, Dec 12, 2021 - 08:00 PM

New data released Friday by the Bureau of Labor Statistics showed price inflation in November rose to the highest in four decades. Americans are getting antsy about persistent inflation wiping out their real wage gains as Allianz Chief Economic Advisor Mohamed El-Erian warned the Federal Reserve is losing credibility by not tapering its balance sheet to rein in inflation.  

El-Erian told CBS' "Face the Nation" on Sunday that the most significant miscalculation in decades is the Fed's inability to characterize inflation correctly. As readers know, Fed Chair Jerome Powell retired the "transitory" narrative on Nov. 30 and opted to label inflation as persistent. 

"The characterization of inflation as transitory -- it's probably the worst inflation call in the history of the Federal Reserve," El-Erian said. 

"It results in a high probability of a policy mistake," he said. "So the Fed must quickly, starting this week, regain control of the inflation narrative and regain its own credibility. Otherwise, it will become a driver of higher inflation expectations that feed off themselves."

El-Erian said Powell "needs to ease his foot off the accelerator" in reference to the $120 billion in bond buying every month. He said there is "no reason why they [Fed] should be injecting so much liquidity," adding that the Fed should not be boosting housing prices at a time when an unaffordability crisis is emerging.

Reducing bond-buying today will avoid a future hard wind-down of the balance sheet that could shock the economy into turmoil, El-Erian said. He has repeatedly said the Fed underestimated inflation risks that have led to soaring prices for energy, food, and shelter to all sorts of other consumer items, such as automobiles

The Fed has been on a bond-buying spree for at least 20 or so months, purchasing $80 billion of Treasuries and $40 billion of mortgage-backed securities every month. Low rates have overstimulated the economy, pushing November's Consumer Price Index to 6.8% YoY, or the highest print since 1982. 

November's CPI print is another blow for team transitory as the drivers of inflation were increasingly broad-based. 

El-Erian doesn't believe peak inflation has arrived and thinks consumer price increases could remain elevated in the months ahead. His comments on Friday were not far off from remarks made at the ADIPEC energy industry forum in Abu Dhabi last month. 

It's terrific to hear market realist El-Erian on mainstream media, continuing to pound the table about the Fed's terrible inflation call.