• Sees more volatility as tightening spurs financial instability
  • Central banks won’t allow higher inflation without ‘more pain’

Mohamed El-Erian has a cautionary word for anyone anticipating an end to interest-rate increases from the Federal Reserve and other central banks.

“All of you who are looking for a pivot, be careful what you wish for,” the chief economic adviser at Allianz SE and Gramercy Funds chairman told Bloomberg Television’s The Open on Friday. “This pivot only happens if you have an economic accident or a financial accident. And the journey to an economic accident or a financial accident is a very painful journey.”

The closely followed investor and strategist points to the upheaval in markets this past week, highlighted by the Bank of England intervening to stop a meltdown in gilts after a UK tax cut proposal, as a sign of economic fragility. 

“This week has told us a lot about the transitions going on,” said El-Erian, who is also president of Queens College, Cambridge and a Bloomberg Opinion columnist. “The next few weeks are going to be pretty volatile.”

More than a year ago, El-Erian said the Fed was behind the curve in fighting the fastest inflation in decades, a prediction that came true as the central bank began a rate-hike regime in 2022 that shows no sign of stopping. Financial markets from stocks to bonds to credit have dropped in value this year and liquidity is shrinking to the point where the riskiest deals are now getting hung up.

“How do you reconcile the need to tighten monetary policy with the need to maintain financial stability?” El-Erian said. “That tension is playing out not just at the domestic level but the international level.”

The BOE isn’t the only central bank that has intervened in markets recently, with the Bank of Japan moving to shore up its currency against a soaring dollar. 

“These interventions to be clear are temporary,” said El-Erian. “It tells you that the global economy is not clearing on its own. If it is allowed to clear on its own, there’s going to be a lot of collateral damage.”

But with global inflation proving to be persistent, the Fed and its peers likely have no choice but to stick with plans for rate increases, at least for now.

“There has to be more pain before we get to a world where central banks say we are changing our inflation target,” El-Erian said. “There is a justification for changing the inflation target. [But] the credibility blow would be significant.”