El-Erian warned that investors may not be pricing risks into the market because the rally in stocks shows that markets ignored some of Powell's remarks on inflation.
His remarks were not heard by the market. In an interview with CNBC on Thursday, El-Erian said that Powell's speech at the Brookings Institution a day earlier, where he signaled that the Fed could slow the pace of rates hikes, was balanced. According to a number of Wall Street forecasts, officials are likely to deliver a 50 basis-point hike in December.
The stock market gained 4% on Wednesday after Powell's comments. Powell's comments may have given the market a major, terrible charge, as it could lead investors to ignore key risks to stocks, according to El-Erian.
Inflation could stay at 4% next year due to supply chain issues and changing globalization dynamics. As well as possible credit and corporate earnings, investors are not pricing in that possibility.
Inflation risks are over according to the marketplace. There is no sign of a recession and the market is not focusing on credit and earnings risk.
Other market commentators have heard his concerns. Morgan Stanley's top stock market forecaster, Mike Wilson, warned that the stock market could fall 26% to 3000 in the first half of the next decade as earnings expectations were too high. If an earnings recession takes hold of the market, Data Trek warns of a 29% drop.
The risks of a downturn in the US are still uncomfortably high despite the fact that a recession is still avoidable. The Fed isn't likely to bolster the economy with more money if the US goes into a recession.
He told investors to not assume that the downturn would be long and deep. The Fed officials made a mistake when they said rising prices weretransitory.
Don't say it will be short and shallow. There is a high chance that we will fall into a recession. El-Erian said that we shouldn't repeat the mistake of last year, when we all embraced inflation.