Mohamed El-Erian warns an interest-rate pivot would come at a 'painful' cost

'Be careful what you wish for,' chief economic adviser at Allianz SE says

Mohamed El-Erian, chief economic advisor at Allianz SE, speaks during the 31st Annual Meeting of the Bretton Woods Committee at the World Bank Headquarters in Washington, D.C., U.S., on Wednesday, May 21, 2014. This year's meeting brings together leaders and experts from business and civil society to consider the value and changing nature of multilateralism in an age of austerity. Photographer: Pete Marovich/Bloomberg via Getty Images
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Mohamed El-Erian had a cautionary word on Friday for anyone hoping for an end to interest-rate increases from the US Federal Reserve and other central banks

“All of you who are looking for a pivot, be careful what you wish for,” the chief economic adviser at Allianz SE and Gramercy Funds chairman told Bloomberg Television’s The Open.

“This pivot only happens if you have an economic accident or a financial accident. And the journey to an economic accident or a financial accident is a very painful journey.”

The closely followed investor and strategist pointed to the upheaval in markets this past week — highlighted by the Bank of England intervening to stop a meltdown in gilts after a UK tax-cut proposal — as a sign of economic fragility.

“This week has told us a lot about the transitions going on,” said Mr El-Erian, who is also president of Queens College, Cambridge and a Bloomberg Opinion columnist. “The next few weeks are going to be pretty volatile.”

More than a year ago, Mr El-Erian said the Fed was behind the curve in fighting the fastest inflation in decades, a prediction that came true as the central bank began raising rates in 2022 — something that shows no sign of stopping.

Financial markets from stocks to bonds to credit have dropped in value this year and liquidity is shrinking to the point where the riskiest deals are now getting hung up.

“How do you reconcile the need to tighten monetary policy with the need to maintain financial stability?” Mr El-Erian asked. “That tension is playing out not just at the domestic level but the international level.”

The BoE is not the only central bank that has intervened in markets recently, with the Bank of Japan moving to shore up its currency against a soaring dollar.

“These interventions to be clear are temporary,” he said. “It tells you that the global economy is not clearing on its own. If it is allowed to clear on its own, there’s going to be a lot of collateral damage.”

But with global inflation proving to be persistent, the Fed and its peers likely have no choice but to stick with plans for rate increases, at least for now.

“There has to be more pain before we get to a world where central banks say we are changing our inflation target,” Mr El-Erian said.

“There is a justification for changing the inflation target. [But] the credibility blow would be significant.”

Updated: September 30, 2022, 7:23 PM