Economist Mohamed El-Erian. REUTERS/Shannon Stapleton
Mohamed El-Erian, economist, stated that if the Fed moves too slowly in tightening its monetary policy it would cause financial markets to crash.
He said that although it is not a case of "baseline", the Fed could plunge the economy back into recession.
El-Erian stated that the Fed should have already tightened its policy to combat inflationary pressures months ago.
The Federal Reserve will begin to reduce the stimulus measures it implemented last year in response to the COVID pandemic. However, tightening monetary policies at a slow pace could cause investors to flee stocks, Mohamed El-Erian, renowned economist, said Monday.
"When there is a major shock in the market, it causes a rise in risk aversion... So what big shock should we avoid? El-Erian stated that a policy error is a mistake during a CNBC interview.
"Example: The Fed being too slow, then having to slam the brakes and sending down the economy into recession. This is not a baseline, but it's a risk. This is the kind of thing that can shift mindsets from relative [about equities] to absolute. We can hopefully avoid that."
Last week, the Fed stated that it would lower the monthly amount of mortgage-backed securities and bonds it purchases from its current pace of $120 billion to begin in November.
This suggests that the Fed will try to lower inflation levels, after focusing on economic recovery. Investors expect the Fed will raise interest rates from close to zero by mid-2022.
El-Erian stated that the US central bank should have already been cutting asset purchases a few months back because inflation has been high for a long time. Economists point to many factors, including supply-chain problems plaguing many industries, as the reasons why wholesale and consumer inflation readings are at multi-year highs.
El-Erian stated Monday that "[We] haven't had a history where the Fed was late in tightening, and hasn't sent [us into recession]." He noted that a recession could impact earnings, which are the main driver of stock market prices.
Monday's close of the S&P 500 index reached a new record, increasing its gain to around 25% for the year.
