- Mohamed El-Erian has once again warned of Fed policy mistakes, following the past year’s aggressive monetary tightening.
- “I fear that this may well end up being the biggest #Fed policy mistake in several decades,” the top economist tweeted.
- He cited financial commentary that suggested the Fed’s recent bank stress tests failed to examine the impact of high interest rates on lenders.
Top economist Mohamed El-Erian has once again warned that the Federal Reserve’s recent monetary policy choices could turn out to be their biggest mistake in decades.
The chief economic adviser at Allianz has repeatedly criticized the US central bank for reacting too late to an inflation surge that started in 2021, and then unleashing an aggressive monetary-tightening campaign that has raised risks of recession and financial instability. A series of bank failures in the US over the past month were seen to have been caused in part by the rate surge.
“As first mentioned almost a year ago, I fear that this may well end up being the biggest #Fed policy mistake in several decades,” El-Erian tweeted on Monday.
He highlighted commentary from the Peterson Institute for International Economics (PIIE) to suggest that perceived inadequacies in the monetary authority’s recent bank stress tests were among factors “that reinforce the view of an ongoing series of policy errors by the Federal Reserve.”
In February, the Fed published macroeconomic scenarios to gauge the 2023 stress test of large banks. The PIIE recently criticized those for using macroeconomic scenarios that weren’t varied enough and didn’t gauge the possible effects of higher interest rates on banks, El-Erian noted in his tweet.
The collapse of Silicon Valley Bank in March, the biggest lender failure since 2008, was triggered by massive losses on its bond portfolio following the rise in interest rates.
“For reasons that need not detain us here, banks of SVB’s size were not included in these stress tests. But the question remains: Just how appropriate is the choice of macroeconomic scenarios?” the PIIE report said.
El-Erian also pointed to comments made by Julius Baer CEO Philipp Rickenbacher to the Financial Times about the impact of high rates on the banking system.
“Things will remain very complicated — everything that was there a month ago will not go away,” Rickenbacher told the FT. “There’s still some room for policy mistakes at the highest levels when it comes to interest rates . . . everyone’s senses are sharpened right now.”
El-Erian has previously said that the central bank’s rapid tightening and mischaracterization of inflation as transitory were “two big mistakes that [he thinks] are going to go down in the history books.”
He also recently warned that the Fed is once again juggling a complicated “trilemma” of problems, which are inflation, growth and financial stability. Only that this time, there’s no “first best policy response” the central bank can take amid the banking turmoil.