Mohamed El-Erian has warned the Fed's rate hikes may fail to squash inflation – but could tank the US economy and job market anyway

  • Mohamed El-Erian warned of slower global growth, stubborn inflation, and higher unemployment.
  • The top economist pointed to signs of weaker demand and the likelihood of further Fed rate hikes.
  • El-Erian has said Europe’s energy crisis and China’s lockdowns raise the risk of stagflation.

Mohamed El-Erian has raised the prospect of a worldwide economic disaster in the form of slowing growth, stubbornly high inflation, and surging unemployment.

“Lower US growth and a late #Fed forced to raise 75 basis points for a record third consecutive time are consistent with global stagflationary tendencies,” he tweeted on Saturday. “Wouldn’t surprise me to see further growth revisions.”

Allianz’s chief economic adviser was referring to Goldman Sachs trimming its US GDP growth forecast for 2023 from 1.5% to 1.1% last week. The investment bank predicted the Federal Reserve will roughly double its benchmark interest rate to between 4% and 4.25% by the end of this year.

Stagflation” describes a toxic combination of stagnant economic growth, elevated inflation, and rising joblessness. In El-Erian’s view, the Fed’s aggressive interest-rate hikes risk choking growth and driving up unemployment, while failing to temper price increases.

PIMCO’s former CEO and co-chief investor flagged the risk of stagflation in a Friday tweet, after the Financial Times reported that corporate insolvencies in England and Wales jumped 43% year-on-year in August.

“Sadly, such troubling news is likely to increase in the months ahead as some companies struggle to navigate the mix of high costs and falling demand — the twin blows of #stagflation,” he said.

Earlier in September, El-Erian warned that global growth has become more fragile thanks to Europe’s energy crisis, China’s continued lockdowns, and the US’s high inflation and waning demand. As a result, central banks are at higher risk of inadvertently plunging their economies into recession, he argued.

“Needless to say, this is not a good environment for central banks to be playing catch-up,” he said. “The risk of yet another policy mistake, already uncomfortably high, is increasing.”

Other market commentators have issued gloomy outlooks in recent days. Nouriel Roubini, an economist nicknamed “Dr. Doom” for his dire predictions, said the Fed would have to roughly double interest rates to 5% to beat inflation – tanking growth, asset prices, and the job market in the process.

“I worry about a stagflationary debt crisis, because you have the worst of the ’70s in terms of supply shocks, and you have the worst of the global financial crisis because of too much debt, and that combination is dangerous,” Roubini said.

Read more: A market-beating inflation ETF manager shares 4 tips for outperforming as red-hot price growth threatens to send stocks to new lows

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