El-Erian Questions Fed's Over-Optimism About Inflation Easing: 'Horrible Forecasting' Or 'Bit Of Politics?'

Allianz chief economic adviser and noted economist Mohamed El-Erian said he thinks the Federal Reserve has been too optimistic about inflation coming down and "way too optimistic" on growth.

During an interaction with CNBC’s Squawk Box, when El-Erian was asked if the Fed was not being honest with the public, he said their projections have been horribly wrong and the error has been one-sided for the last two years.

“They have been way too optimistic on inflation coming down and they have been way too optimistic on growth. The question is why has that happened? Is it that their forecasting is horrible? Or, is it that there's a bit of politics playing in here that they don't want to give the bad news,” El-Erian questioned.

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Major Wall Street indices closed over 1% higher on Monday after last week’s subdued performance as investors brace for the release of the consumer price inflation data on Tuesday followed by the crucial Federal Reserve meeting outcome on Wednesday. The SPDR S&P 500 ETF Trust SPY closed 1.44% higher on Monday while the Vanguard Total Bond Market Index Fund ETF BND closed flat.

BoE Comparison: El-Erian also compared the Federal Reserve with the Bank of England explaining how the latter chose not to hold back the bad news.

“The BoE shocked everybody by saying -- ‘Be careful. Inflation may go up to 13%.’ The BoE shocked everybody by saying -- ‘Be careful. We may be in the longest recession that we have seen for a long time, that will last for the whole of 2023.’ Because they did that, they caused the government to change policy and they had an important influence on the economic debate. They didn't hold back the bad news. They said, 'Let me socialize the bad news so that we can actually avoid the bad news.’”

Recession: El-Erian also noted that it’s not necessary to have a recession to bring inflation down. “It's highly probable we're going to have a recession. We may find inflation sticky at around 4% which is going to put the Fed and us all in a difficult situation in the middle of next year,” he said.

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Photo by IMF on Flickr