Mohamed El-Erian Caution Central Banks To Use Their 'Time Outs' Wisely

Economist Mohamed El-Erian is cautioning key global central banks including the Bank of England, Bank of Japan, European Central Bank and the Federal Reserve, who have momentarily halted major policy actions.

In his op-ed in the Financial Times, El-Erian stated that these systemic central banks have paused to reassess the implications of their previous actions. Amid unchanged interest rates, they have left the door open for potential increases in the future.

The “time out” allows these banks to reflect on recent developments, tidy up minor issues, and integrate another round of historical data into their analysis. The central banks are keen on understanding the cumulative effects of their aggressive hikes

The Bank of Japan has gone a step further, incorporating a slight adjustment to its “yield curve control” policy, which aims to maintain low yields through bond purchases.

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However, El-Erian warns that a narrow tactical framing might be problematic in the long term. Strategic issues that demand timely responses need to be addressed.

These central banks are urged to enhance their forecasting techniques, be more transparent about the trade-offs in achieving inflation targets, and possibly review these targets openly.

Furthermore, the Federal Reserve is advised to correct recurring communication issues, overhaul an outdated Monetary Policy Framework, and restore credibility and accountability.

The Bank of Japan, on the other hand, is recommended to adopt a more comprehensive approach to its time out, particularly as markets grow impatient with its overly cautious exit from YCC.

The central banks’ “time out” strategy is seen as a potential bolster to their policy prospects and a defense against the rising risk of adverse spillovers from an untidy exit from the YCC program in Japan and the forthcoming surge of government debt issuance in several countries.

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