Fed has ‘wrong inflation target,’ should be less data dependent, El-Erian says
The Federal Reserve admits it’s still a long way from meeting its inflation target, recently forecasting it may not get there until 2026. But as the inflation fight lingers on some think the central bank’s 2% inflation target just isn’t the right number.
Yahoo Finance’s Hamza Shaban reports:
The dependence on economic data that has been a guiding light of Jerome Powell’s tenure at the Federal Reserve is also one of its great weaknesses, said Mohamed El-Erian, in a new interview with Yahoo Finance’s Julie Hyman on Thursday.
In critical remarks of the US central bank, the president of Queens’ College, Cambridge, and chief economic adviser at Allianz, said that Powell’s emphasis on backward looking data, which operates with a lag, has denied the economy and market observers the clarity and vision that were present under previous eras of the Fed.
El-Erian pointed to the sharp rise in Treasury yields as a cause for concern.
In addition to the higher borrowing costs for both households and businesses and the drag on the economy, he emphasized the abrupt climb of yields. “There’s fear, and I hope it’s just a fear, that this could break something.”
Treasury yields have continued their march higher, with the 10-year Treasury reaching 4.9% for the first time since 2007 in a move that has dragged the stock market lower. As investors sell bonds, prices fall and yields rise. And as this year’s sell-off in the bond market deepens, Yahoo Finance’s Jared Blikre reports, there’s increasing worry that an approach towards a big, round number like 5% for 10-year yields can serve as a psychological magnet for investors, lifting yields even higher.
For El-Erian, Fed policy is no longer an anchor. “It’s too backward-looking,” he said. “So this is really a hard time for the bond market. And we need stability. We desperately need stability.”
Powell is scheduled to speak later today, amid the escalating conflict in Gaza and ongoing geopolitical tensions. El-Erian said he’d like the Fed chair to pull back from an approach that is “excessively data dependent.” Instead, he’d like Powell to recognize that “you cannot drive a car on a curvy road looking through the back-view mirror,” he said.
