Fed’s 2% Inflation Target Could Crush US Economy, Economist Warns

• Economist Mohamed El-Erian has warned that the Federal Reserve cannot achieve its 2% inflation target without crushing the U.S. economy.
• He suggested a higher stable inflation rate of 3-4%.
• The Allianz economic advisor criticized the Fed for being too data dependent and warned that it could lose credibility if it changes its inflation target.

Economist Warns of Crushing US Economy

Economist Mohamed El-Erian, Allianz’s chief economic advisor and chair of Gramercy Funds Management, has warned that the Federal Reserve cannot achieve its 2% inflation target without „crushing“ the U.S. economy. He suggested that a higher stable inflation rate of 3-4% is necessary for a sustainable recovery.

Fed Criticized for Being Too Data Dependent

The Allianz economic advisor criticized the Fed for being too data dependent and warned that it could lose credibility if it changes its inflation target. El-Erian argued that there are several factors necessitating a higher target inflation rate, including energy transition, supply chain changes due to COVID, tight labor markets, and changing geopolitical issues.

January CPI Report

The government’s consumer price index (CPI) data released Tuesday showed prices increasing by 0.5% in January on a month-by-month basis – the most since October – while on an annual basis consumer prices climbed 6.4%, down from 6.5% in December. Following this report several Fed officials said they may have to raise interest rates beyond initial expectations in order to subdue ongoing price pressures.

Predictions of “Sticky” Inflation Around 4%

In January El-Erian predicted that inflation may become „sticky“ around 4%. This would be an increase from current levels and suggests the Fed should take into account long term goals rather than focusing solely on short term data when making decisions about interest rates and other monetary policy measures .

Credibility at Stake

El-Erian further asserted that if the Federal Reserve were to change their official inflation target after having missed their current goal by such a large margin it could result in serious damage to their credibility as an institution responsible for guiding monetary policy decisions in America .