Fed Made '2 Big Mistakes:' Top Economist Warns 'We Risk A Very High Probability Of A Damaging Recession'

Allianz chief economic adviser and noted economist Mohamed El-Erian has criticized the U.S. Federal Reserve, saying the central bank made "two big mistakes that may go down in the history books."

What Happened: “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 in a meaningful way,” El-Erian told CBS News.

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On Recession: The economist explained how the Fed’s actions create the risk of recession. “And as a result, we risk mistake number three, which is by not easing the foot off the accelerator last year, they are slamming on the brakes this year, which would tip us into recession,” he said.

The economist said the Fed has to not only overcome inflation but restore its credibility. “So, yes, I fear that we risk a very high probability of a damaging recession that was totally avoidable,” he said.

On Market: El-Erian also raised concerns about the current market volatility, noting that bonds, which are supposed to safeguard investments, are down by about 15%. “So there's been nowhere to hide. That's why people feel insecure. That's why they look at their retirement plans with concern,” he said.

Stocks and bonds have equally been hammered by the aggressive rate actions of the Fed and other central banks. The SPDR S&P 500 ETF Trust SPY has lost over 24% since the beginning of 2022, while the Vanguard Total Bond Market Index Fund ETF BND has shed over 15% in the same period.

“The president is right. We are currently on what I think of as a bumpy journey to a better destination, and we need to navigate both the journey and get ready for the destination. There is a possibility that the Federal Reserve makes another mistake and that that bumpy journey actually changes the destination. That's why the markets are on edge,” El-Erian said.

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Photo by International Monetary Fund on Shutterstock