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Investing.com – Economist Mohamed El-Erian, chief economic advisor at Allianz, warned investors once more that he has made his biggest policy mistake in decades.
The problem, he added, is groupthink, as the Fed’s decision-makers seem to lack the diversity of viewpoints and overall experience found in other major central banks.
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The biggest mistake… being late
“As we first reported nearly a year ago, I fear this is the Fed’s biggest policy blunder in several decades,” El-Erian wrote on Twitter on Monday.
This time, El-Erian cited insufficient bank stress tests that failed to accurately measure how banks handled the rally following the Fed’s most aggressive policy tightening cycle in decades.
The chief economist has repeatedly questioned the Fed’s decisions in the past year, saying the US central bank has been late in responding to rising inflation.
After losing the right time to start raising interest rates, the Fed began its tightening monetary policy, which increased the possibility of economic contraction and financial instability.
El-Erian’s comments came following a series of bank failures in the US last month, with the collapse of the Silicon Valley bank in March the most significant bank failure since 2008.
A continuous series of errors
El-Erian also pointed to a comment from the Peterson Institute for International Economics (PIIE) highlighting inadequate bank stress tests that reinforce “the view that this was the product of an ongoing series of monetary policy mistakes by the Fed.”
The Peterson Institute released a report last week stating that the Fed’s recent bank stress tests used “inadequate crisis assessment scenarios” and that “none of them addressed high interest rates.”
It follows the Fed’s publication in February of macroeconomic scenarios assessing the stress test for major banks in 2023.
“For reasons we don’t know, banks of the size of Silicon Valley were not included in these stress tests. The question remains: How appropriate is it to develop macroeconomic scenarios that do not include all banks? Especially following this crisis,” the report said.
Allianz Chief Economic Adviser (TADAWUL:) previously criticized the Fed for defining inflation as “temporary” in 2021 and then proceeded to tighten at the fastest pace in decades to raise its main policy rate from around zero to a range of 4.75%-5%.
Global growth was another major concern for El-Erian, who in another tweet referred to a “realistic study from the World Bank.” In its latest report, the World Bank warned that average global economic growth would drop to a three-decade low of 2.2% annually through 2018. 2030, adding that this would lead to a “lost decade” for the global economy.
Good reasons for concern
There are good reasons for concern, El-Erian said. In just the past three years, the Fed has mishandled the rate-raising cycle, confronted allegations of insider trading, faltered in its oversight of banks, and, through inconsistent communications, fueled market volatility rather than pacifying it in the future. several occasions.
He continued: These failures are becoming increasingly important to the public. Inflation has been too high for too long, robbing people of purchasing power and hitting the poor hard. These developments, including the risk of a reduced availability of credit, raised the risk of the United States falling into recession, fueling income insecurity in what would have been an otherwise strong economy.
He added: The Fed’s problems should worry everyone, as the loss of credibility directly affects its ability to maintain financial stability and direct markets in a manner consistent with its dual mandate of maintaining price stability and supporting maximum employment. Personally, I cannot remember a time when so many former Fed officials were critical of the institution’s economic outlook, which in turn guides the design and implementation of its monetary policy.
Two main problems
Al-Erian stressed: At this stage, there is no denying that the most powerful central bank in the world has regressed in its analyzes, expectations, policy-making, and communications. This is the bad news. The good news is that the Fed can still right the ship by adopting a better strategic approach to its analysis and actions, and by addressing two major structural problems.
The first problem is groupthink: Fed policymakers seem to lack the diversity of viewpoints and comprehensive experience found in other major central banks. They would do well to follow the Bank of England’s lead and add two independent external members to the Fed’s policy-making committee.
The second problem relates to basic accountability. While the Fed chair appears before Congress twice a year, these hearings are not conducive to focusing on what really matters such as the design and implementation of Fed policy. The process needs additional recommendations and data, as professionals in the field also report to Congress before regularly testifying.
