It never rains to everyone’s liking, and some voices have been criticizing the accommodative policies of the US Federal Reserve for several months. The last to join has been Mohammed El-Erian, Allianz adviser and renowned university professor, who has pointed out that the measures that the US central bank has been implementing to remove the country’s economy from the effects of the pandemic can generate a “perfect storm” that not only harms people but also increases social inequality.
In an article in The Washington Post , El-Erian argues that the current course of the body headed by Jerome Powell may lead to “a combination of high inflation, slower growth and financial instability ” later this year and early 2022. ”
This would have political and social consequences that could further undermine the much-needed economic recovery and expose the most vulnerable segments of our population to further pain. And it would take hold at a time when, due to persistent high inflation, the Fed it would feel obliged to step on the monetary policy brake, aggravating all the elements of this unfortunate mix, “he says.
In this sense, the also president of Queens’ College establishes five reasons why the initiatives of the Fed will harm the economy and Joe Biden’s economic program.
First, El-Erian stresses that the central bank is not using the right tools to boost the economy, since the fundamental problems lie in the supply shock, given the bottlenecks in production, as well as the problems to find skilled workers and in supply chains.
On the other hand, the professor alludes to the fact that accommodative policies are only going to further drive inflation to have demand already on the rise, one of the main concerns that many economists have been pointing out in recent weeks.
Although the Fed affirms that it is a temporary inflation as a result of the economic recovery, scholars such as El-Erian believe that it may be a more sustained circumstance over time that ends up harming the consumer and cooling consumption.
Third, El-Erian claims that intervention in the markets is distorting the pricing system , which will reduce productivity and the dynamism of the economy.
At the stock market level, the guru indicates that risk taking is being encouraged in the markets , with companies trading well above the value that would be sensible given their accounts.
Finally, El-Erian focuses on the real estate sector, since he considers that the purchase of mortgages by the Fed is overheating prices , which affects the citizen, who will have to pay more to acquire the same property.
To avoid all this, the professor turns to the proposals of the Biden Administration, defending its fiscal program. El-Erian believes that it is essential to carry out the infrastructure plan that continues to be debated in Congress, in a way that contributes to eliminating bottlenecks on the demand side, as well as creating jobs.