Mohamed Aly El-Erian, Chief Economic Advisor of Allianz Group.
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Mohamed El-Erian, chief economic adviser to Allianz, said on Friday that the Federal Reserve has become too dependent on data and has lost sight of its overall strategy.
The economist told CNBC that looking at a longer-term, more strategic outlook, policymakers may set a new inflation target closer to 3%.
“This Fed is not strategic, it’s over-reliant on data, and it’s become A play-by-play commentator.”
“That’s not the Fed’s job,” he continued. “The Fed should be strategic, the Fed should provide a strategic anchor, a stabilizer.”
“The mistake they might make is they’ll be too tight this time,” he said.
The Fed did not immediately respond to CNBC’s request for comment.
El-Erian’s comments come after Fed policymakers have recently begun to take a conservative stance on cutting interest rates.
Federal Reserve Chairman Jerome Powell said on Wednesday that the central bank needs further evidence to assess current inflation conditions, casting doubt on expectations for a rate cut in June.
A day later, Minneapolis Fed President Neel Kashkari said he wanted to know whether the central bank should cut interest rates if inflation remains elevated, sending markets tumbling.
El-Erian said the comments were an example of the Fed “overreacting to data” and said the central bank should take a more comprehensive view of the economy.
However, he noted that policymakers’ hawkishness could be a sign that they are considering the possibility of a new normalized inflation target.
“The polite way to discuss this is that you don’t say ‘let’s change the inflation target,’ you say ‘let’s get to 2% at some point in the future. Let’s have a trajectory,'” El-Erian said . “This is likely to prove that the economy is stabilizing at a level closer to 3%. I don’t think it will weaken inflation expectations,” he added.
In order to bring inflation back to its target level, the Fed has raised interest rates a total of 11 times in the past few years, with a target range of 5.25%-5.5% – the highest level in 22 years.
