Allianz’s chief economic adviser Mohamed El-Erian doomed President Joe Biden on CBS’s “Face the Nation” saying the upcoming recession we face was ‘totally avoidable.’ He said:
“I fear that we risk a very high probability of a damaging recession that was totally avoidable. One is mischaracterizing inflation as transitory. By that, they meant it is temporary, it’s reversible, don’t worry about it. That was mistake number one. And then mistake number two, when they finally recognized that inflation was persistent and high.
“They didn’t act. They didn’t act in a meaningful way. Even Federal Reserve Chair Powell has gone from looking for a soft landing to soft-ish landing to now talking about pain.
“And that is the problem. That is the cost of a Federal Reserve being late. Not only does it have to overcome inflation, but it has to restore its credibility.”
MAJOR GARRETT: Is it your perspective that the Federal Reserve has already made a series of mistakes, either not acting fast enough or overreacting?
MOHAMED EL-ERIAN: So it’s made two big mistakes that I think are going to go down in the history books. One is mischaracterizing inflation as transitory. By that, they meant it is temporary, it’s reversible, don’t worry about it. That was mistake number one. And then mistake number two, when they finally recognized that inflation was persistent and high. They didn’t act.
They didn’t act in a meaningful way. And as a result, we risk mistake number three, which is by not easing the foot of the accelerator last year, they are slamming on the brakes this year, which would tip us into recession. So, yes, unfortunately, this will go down as a big policy error by the Federal Reserve.
MAJOR GARRETT: Continuing your metaphor for slamming on the brakes, does that mean it is impossible to achieve the either literal or mythical soft landing?
MOHAMED E-ERIAN: Even Chair Powell has gone from looking for a soft landing to soft landing to now talking about pain. And that is the- the problem. That is the cost of a Federal Reserve being late.
Not only does it have to overcome inflation, but it has to restore its credibility. So, yes, I fear that we risk a very high probability of a damaging recession that was totally avoidable.
MAJOR GARRETT: Washington, D.C. is a hyper political town. Not a news bulletin. So it tends to absorb information internationally, sometimes in personal ways. So there’s a lot of chatter this week that when OPEC+ decided and announced, it was cutting production. But that was against President Biden specifically.
Do you agree with that or do you think it’s a broader OPEC plus declaration about the direction of the global economy?
MOHAMED EL-ERIAN: So first, it does hurt the U.S. and we’ve seen oil prices go up above $90 a barrel. What does that mean? It means that inflation, which has been coming down now risks going up again so that- that is not good for us.
However, that it came as a surprise. It didn’t come as a surprise to me. OPEC is looking to protect oil prices in the context of declining global demand. All three major areas in the world China, Europe and the US, are slowing much faster, which means less demand for oil. So what does OPEC’s do?
They cut back supply. So this shouldn’t have come as a big surprise. That’s what they do. That’s the history. But it’s certainly not good news for the U.S. economy.
MAJOR GARRETT: Tying these things together, do you think higher gasoline prices inevitably mean higher inflation, making all the things we’ve discussed more complicated? And do you have a consumer price index prediction for the near future?
MOHAMED EL-ERIAN: So the next measure comes out in a few days. That’s going to be for September. Headline inflation will probably come down to about 8%. But core inflation, what measures the drivers of inflation and how broad they are is still going up. So we still have an inflation issue. Inflation will come down.
Major, The question is, does it come down with a slowdown in the economy or a major recession? That is the question that’s being debated right now. It’s not whether we’ll have inflation coming down. We will, but it’s the cost of that inflation coming down.
MAJOR GARRETT: Is the jobs report this week a silver lining in all of this otherwise gloomy assessment?
MOHAMED EL-ERIAN: It certainly is. We created 260- 263,000 jobs. That’s a lot for this stage. We also reduced the unemployment rate to 3.5%. That’s really low. That was one. One concern, which is that labor force participation, how many people are in the labor force came down. And that’s not good news. And it talks to the importance of focusing on human capital.
MAJOR GARRETT: One last thing before I let you go. We have about 30 seconds. About two or three months ago, it was common for people on the Web to see stagflation headlines. We are not in a stagflation situation.
MOHAMED EL-ERIAN: We are. Growth is coming down. Inflation is still high. Unfortunately, it’s not time to eliminate that term yet.
MAJOR GARRETT: Very good. Mohamed El-Erian, we thank you so much for your time. And we will be right back.
See the full transcript here.