Fed blinking in ‘front of financial instability’ is the ‘worst thing they can do,’ warns economic adviser

FAN Editor

Allianz chief economic adviser Mohamed El-Erian joined “Fox News Sunday” to discuss the fallout from the banking failures and how policies from the Federal Reserve factored into the crisis, explaining how the Fed’s mismanagement “came together to form a perfect storm.”

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MOHAMED EL-ERIAN: … So three things came together in the perfect storm. One is mismanagement by SVB [Silicon Valley Bank]. Two is lapses in supervision. You had a bank that grew enormously under the nose of the Federal Reserve, and the Federal Reserve did not pay enough attention. And then the third issue that’s impacting us well beyond the banking system. One of the worst policy mistakes by the Federal Reserve in the way it has handled the interest rate increases. It did nothing for a while, mischaracterizing inflation as transitory; it then realized it wasn’t transitory but still didn’t do enough, and then it slammed on the brakes in one of the most pronounced interest rate hiking cycles, and that has destabilized weak institutions, weak individuals and weak companies. 

… So the worst thing they can do is once again blink in the eye, and in [the] front of financial instability. They’ve done that over and over again, and that’s why we are in this problem. They should do two things. One, they should raise interest rates by 25 basis points, a quarter of a percentage point because we have an inflation problem and we need to get over this inflation problem. And second, they need to remind people credibly, which is going to be hard, credibly, that we have multiple tools: interest rate policy to deal with inflation and other tools to deal with financial instability. The European Central Bank did it on Thursday. It worked there. Hopefully the Fed has enough credibility to do it here.

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… You know, when you drive very fast on the freeway, as the Fed did in the middle of a fog, and then you panic and hit the brakes. You will cause financial accidents — and you may even cause economic accidents in terms of a recession.

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