This week may be the week central banks stepped away from strict inflation targets: Mohamed El-Erian

Mohamed El Erian is here, Chief Economic advisor Dalian, President of Queens College at Cambridge University and a a Fed. Are you a whisperer or what are you, a a observer, a Fed, Fed observer? Did you think it was dovish, more dovish than you were expecting yesterday? Oh, absolutely, and in two ways. One is a signal that they’re willing to tolerate higher inflation for longer. And second, something that is flying below the radar screen is what what Chair Powell said about QT said about the balance sheet, saying that he’s willing to slow down the journey to a lower balance sheet. I think that twin patients means that we may well look back on this week as the week in which central banks stepped away from a very strict inflation target to a much broader concept of inflation. In your view, nothing to do with the election. So I would like to believe the Fed in saying that it is apolitical, you would like to believe, do you believe? Look, I have no other reason to believe otherwise. Well, it was a weird, it was weirdly dumbest. And I keep bringing up that that suddenly it seems like the asymmetric risk is now of a recession after we’ve had two really hot inflation numbers. So I I was with you when when you asked me what what does the outlook look like? I told you 55% soft landing, 30% recession, 15%, something better than than that. And I think, I think that they realized two things. I think they realized that the economy is weakening, but they’ve also realized, or I hope they’re going to realize, that we are living in a world in which the supply side is the problem and that we need to tolerate slightly higher inflation if we don’t want to sacrifice the economy. And I think that’s the right thing, is the problem because why is it because governments are still spending so much. the United States government is still put spending so much money. I mean it’s it’s weird to have fiscal doing one thing, monetary doing the other thing correct. And we should be doing more to enhance the supply side. It is the problem. First, because of material politics, we are redesigning supply chains. Second, companies are emphasizing resilience as much as efficiency. So they are embarking on a more costly supply train for good reasons. Third, the labor market is not as flexible as we’d like it to be. And then we’re looking at a very uncertain energy transition. You put all that together and supply will not be flexible enough and the Fed will have a choice. Either it accepts slightly higher inflation or it unnecessarily tips the economy into recession. What’s to say that the inflation remains slightly higher and doesn’t get out of control? That’s the bet. That’s absolutely the risk. But there’s been no evidence so far of the anchoring inflation expectations and markets are behaving in in this way. On the inflation side, look at gold, look at equities, but then look at treasuries and you get no indication of inflation expectations like crosscurrents. But, but we said that there’s a lot of animal spirits for the Fed to be worrying about of recession. And you said the economy is weakening. Well, I’ve seen 2 hot inflation numbers two straight months I’ve seen that I haven’t 3 because PPI as well. So three straight. But they’re now they’re saying it’s transitory. Again, I haven’t seen where’s the weakness in the economy you’re talking about. Oh, you’re seeing it in manufacturing. You’re starting to pick it up in other elements in the quits rate. Then there’s a lag and it’s going to get, it will continue to slow. It will continue to slow and they’re trying to make that slowing as orderly as possible. It is fascinating to me that when Chair Powell was asked about financial conditions, everybody that looks at broader financial conditions says, gosh, they are so loose. He dismissed that completely. He’s looking at a very, very narrow. And in fact, Roger Ferguson repeated it today when he said we are in restrictive territory because they’re looking just at the policy rate relative to other indicators, not at the holistic financial conditions. Roger said that, but then he said and people can argue about how restrictive, which makes me think that that’s a judgment. Are we in restrict? Are you sure we’re in restrictive territory right now Given the economic backdrop, we are more likely to be in restrictive than not restrictive. OK, But look elsewhere as well. The Bank of Japan surprised on the dovish side, the Swiss National Bank today surprised on the dovish side. You’re starting to get a signal from central banks that I believe we’re going to look back at this moment. They all got elections coming up. Let me ask you, did you see what we’re spending next year? A lot of money, 7 trillion. So Obama was the first time ever we went over 4 trillion. Then COVID, COVID, pandemic. We need money. An extra 2 trillion. Got us to six, nine or whatever. Covid’s gone, basically. I mean, I still see. Why are people still wearing masks? I I don’t know, maybe they got the reason. But why are we at 7 trillion? Why 7 trillion next year? Because whether it’s the US or elsewhere, we ratchet, we you never go back from the crisis levels. We don’t. That’s a bad neither does the feds balance. Yeah, the UK is the same thing. It is sad. And at some point we’re going to pay for this. We will pay for this. We have been saying this for so long that we’re going to pay for it. We’re going to be talking to Maya McGinnis a little later about some of the issues surrounding this too. We’ve been saying this for so long, decades and decades. When does it actually? So remember the old PIMCO concept of the cleanest dirty shirt? OK, we live in a relative world, so if we misbehave and others misbehave more, we don’t get punished because we’ve got the reserve currency and we are the place where people outsource savings to. So as long as we remain the cleanest dirty shirt then we’re not going to be punished. If others start being cleaner than us then then this will change. But right now we are the cleanest dirty shirt.