Fed Faces 'Trilemma' Of Inflation, Growth, Financial Stability, Says Economist El-Erian: No 'Good Way Out Of It'

Allianz chief economic adviser and noted economist Mohamed El-Erian believes the Federal Reserve is not just facing a dilemma of inflation fight versus growth — it is in fact staring at a trilemma where financial stability is also a factor.

What Happened: "We don't have a good way out of it," El-Erian told CNBC.

The noted economist believes the least bad steps the Fed could take is to consider a pause following the recent hikes, making sure the financial contagion is behind and assessing the economic contagion, which is harder to counter with policy.

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"And then try to resolve, Joe, this big difference we have between what the Fed is telling us is going to happen to rates and what the markets think. We need to resolve this because the longer it stays unresolved, the bigger the problem when it has to be resolved," he said.

Busy Week: Market participants are keenly watching out for the release of the Personal Consumption Expenditures price index, which is the Fed's preferred measure of underlying price pressures. Investors and traders will also be watching out for remarks by various central bank officials this week.

The SPDR S&P 500 ETF Trust SPY closed 0.19% higher, while the Invesco QQQ Trust Series 1 QQQ lost 0.69%.

On Lending: On being asked about the possibility of lending becoming much tougher in the wake of the banking crisis, El-Erian noted there are two drivers to the same.

"One is banks themselves getting more conservative. But two, it’s banks expecting regulations to get tighter. The regulators and the supervisors have been embarrassed and the response has always been "tighten regulation more," even though this is a failure of supervision more than it is a failure of regulation," he said.

El-Erian also pointed out that the problem to be careful about is the credit side. "It’s this notion of rolling credit contractions that we are all worried about. So, I am not really worried about interest rate mis-matches. I think that can be sorted out by the Fed. I am more worried about the credit issues," he said.

Photo: Courtesy of Wikimedia Commons

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