The following is a transcript of an interview with Mohamed El-Erian, Allianz’s chief economic adviser, which aired on Sunday, March 13, 2022 on “Face the Nation.”
MARGARET BRENNAN: We now want to go to Allianz’s Chief Economic Adviser, and this is Mohamed El-Erian, who is with us this morning from Cambridge, England. Good morning to you.
EL-ERIAN: Good morning, Margaret.
MARGARET BRENNAN: In this country, we saw another high, a maximum of 40 years of inflation. It’s the Fed’s job to control it, and the head of the Fed has some important decisions to make this week. What do you expect?
EL-ERIAN: Well, he doesn’t have an easy decision, like you said. Inflation is high and will rise due to what is happening in Ukraine. And basically, you have to make a decision, slow down, regain credibility, but risk a recession or slow down, and we have an inflation issue next year. We are here because the Fed is very late and no longer has good policy options available.
MARGARET BRENNAN: There are no good political options. Are you expecting what kind of rate hike and what is the risk of recession right now? Goldman Sachs. I know they raised their forecast to at least a 20 percent chance of a recession in the United States.
EL-ERIAN: Yeah, and they think we’re going to do seven climbs this year. I don’t think we have seven climbs. I don’t think this economy can withstand seven increases, and if we do seven, we will go into recession. This is the cost of being late. I suspect what we will hear on Wednesday, Margaret, is a 25 basis point rate hike. We will hear it more along the way, and we will feel that everyone will also hire what has become a nine trillion balance sheet. We are in this absurd situation that last week, when we reached the 7.9 percent inflation rate, the Fed was still putting liquidity into that economy. This only gives you an idea of how the policy has been misaligned.
MARGARET BRENNAN: Well, Mohammed, you’ve been a critic for a long time. You know, the White House this week calls inflation “Putin’s price hike.” But in December you were on this show talking about the severity of inflation. Where exactly is the responsibility for this?
EL-ERIAN: So it’s because of the circumstances, it’s because the Fed is late and it mis-characterizes inflation. Until the end of November, it was said to be transitory, but also to be fair to the administration, there will be a component of Putin’s inflation. I estimate that at 7.9 percent, we’ll probably get a lot closer to or above 10 percent before going down. And that difference will be due to the disruption that Putin’s war entails for commodity prices, supply chains, and shipments.
MARGARET BRENNAN: Double-digit inflation. When do you think we’ll see? I mean, people really feel it now.
EL-ERIAN: Yes, if it happens, it will happen in the summer and people will feel it, the worst thing for us would be that we not only feel the highest inflation, but we also feel loss of income. That is why it is essential to avoid a recession. We cannot avoid stagnation, lower growth, higher prices, but we can certainly avoid a recession and recover quickly.
MARGARET BRENNAN: As I said, I mean, it’s the Fed’s job to control inflation. The White House says so much that it’s not their fault, they’re doing something at the same time. Are there any policy measures here that can really be taken?
EL-ERIAN: There are and are trapped in Congress, you can do more to increase labor force participation to lower wage pressure. It’s about caring for children, it’s about encouraging people to return to the workforce. You can do more to improve productivity, and you can do more to supply, to eliminate supply bottlenecks. The administration has policies. Many of them are trapped in Congress right now.
MARGARET BRENNAN: You know, when you talk about bottlenecks in the supply chain, we have to remember that we are coming out of this global pandemic. And overnight, we are seeing headlines that local authorities in Shenzhen, China, have imposed a new blockade due to a COVID outbreak. This is a major manufacturing hub for the rest of the world. I don’t want to exaggerate this, but to what extent should we care about that as a factor?
EL-ERIAN: We should do this because China is pursuing its zero corporate policy at a time when Omicron is making this policy very difficult to implement. Therefore, they will have sequential confinements that will have us overflowing. You know, we can be a good house, but now we live in a very tough neighborhood. And that’s why it’s so important to respond quickly. We cannot fall behind in politics again.
MARGARET BRENNAN: Again on politics. Okay, that depends on the Fed. But looking ahead to the year, the Secretary of the Treasury already says we should expect 12 months of inflation. When can we play catch up and lower prices again? Where are these tools really out of the hands of policymakers right now?
EL-ERIAN: So Secretary Yellen is right. Unfortunately, we will have at least 12 months of uncomfortable inflation, which we have not had since the 1970s and 1980s, and which will be especially problematic for the most vulnerable segments of our society. It affects especially hot food and gas. As for what we can do, we need to be very careful not to have another wave of inflation because of what economists call anchored inflation expectations. Basically, Margaret, it’s a simple story. Right now, I’m going in. I, being the American worker, and asked for compensation for past inflation. If I do not have faith in my political leaders, I will also ask for compensation for future inflation. I want to protect myself, preventively, this happens, then we have this horrible price-salary-price-price cycle.
MARGARET BRENNAN: Mohamed El-Erian, thank you very much for your analysis this morning, and we’ll keep track of what’s going on in the coming days. We’ll be back in a moment.
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