El-Erian Says Powell's Comments Put Fed In Tricky Dilemma With 2 Options: 'Both Come With Reputational Risks'

Allianz chief economic adviser and noted economist Mohamed El-Erian believes the Federal Reserve is facing a tricky dilemma given the current economic environment where inflation continues to remain sticky.

U.S. equity markets closed in the red on Tuesday after Fed Chair Jerome Powell indicated in his testimony before Congress that the central bank would be prepared to increase the pace of rate hikes if faster tightening seem to be warranted.

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The SPDR S&P 500 ETF Trust SPY closed 1.53% lower while the Invesco QQQ Trust Series 1 QQQ lost 1.23%. Powell's remarks also sent the yield on the 2-year Treasury notes to their highest level since 2007, at over 5%.

"As many of you know, I have felt for a few months now that the 2-year yield was the best indicator of what broader financial markets would do and why. Today's comments by #FederalReserve Chair Powell pushed this yield to over 5%," El-Erian tweeted citing the yield chart.

The Dilemma: The noted economist believes the market's reaction puts the central bank in a dilemma, as continuing with the current rate of 25 bps rate hike is likely to put the Fed behind in its inflation fight.

"… and put the Fed in a tricky dilemma: either validate the market move by negating its prior policy guidance or stay with 25bps and fall further behind. Both come with reputational risks," El-Erian said in his tweet.

El-Erian stated that such a reversal in rate policy, while warranted by a "data dependent" Fed, would aggravate its damaged credibility after the earlier two mistakes in this cycle.

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