Dr. Mohamed El-Erian, chief economic advisor at Allianz, explained that monetary policies in the United States involve extreme risk.
Al-Erian said, in statements to Bloomberg TV, that monetary policy makers at the US Federal Reserve risk severely curbing economic activity by responding aggressively to every data point that appears, adding that a long-term vision should be developed for the area towards which interest rate policy is heading.
Al-Erian continued: “You cannot drive a car without understanding the nature of the road in front of you, and you cannot just look in the rearview mirror and try to adapt to every curve that appears in front of you immediately.”
He added, “This is an inappropriate way to control monetary policy, and certainly not the appropriate way for monetary policy when its effect needs to appear for a long time. This is the first Federal Reserve administration that I know of that did not realize this matter. The risks of excessive tightening of monetary policy with the aim of reducing the US inflation rate to 2 % is real, and I have hope that the Federal Reserve will maintain the standard interest rate unchanged for the rest of the year for the sake of economic stability.
He noted that there is a risk that if we try to get to 2% too quickly it will break something in the economy.
He added: “They need to shift from relying too much on current data, to relying on data that has a more future element. I was hoping that would happen this week, but it did not. This reflects that it is very difficult at the present time to achieve the right balance from “The way to talk about monetary policy. It is good that they will remain calm because too much talk is a source of instability.”
El-Erian cited the Fed’s so-called silent period, during which officials are prohibited from making public statements related to the economy or private interest rate forecasts, leading up to the next meeting.
Al-Erian concluded his speech, saying: “But fundamentally, we need to achieve stability in the bond market, which is considered very important for other markets, the housing market, and the economy, and we will not obtain stabilization factors from the technical or economic aspect, so we desperately need stabilization factors from the monetary policy aspect.”
