If US Fed wants to be true to inflation target, it should hike: Mohamed El-Erian

Mohamed El-Erian

Renowned economist Mohamed El-Erian has said if the US central bank wants to remain true to its 2 percent inflation target, it should definitely hike interest rates during the Federal Open Market Committee (FOMC) meeting on June 13.

“If they are true to their word, they should hike because they are data dependent, and the data has been hotter than expected,” he told Bloomberg TV recently.

El-Erian expressed concern about the Fed’s messaging, saying it led to confusion and uncertainty in the markets. The premature indications of a pause in policy adjustments exacerbated the predicament, fuelling speculation and increased market volatility, he said.

The economist emphasised that clear communication plays a vital role in guiding market participants' expectations and behaviour. The Fed needs to adopt a more transparent and consistent approach to convey its policy intentions effectively and avoid unintended consequences. Failure to do so could result in increased volatility and a loss of credibility for the central bank, the economist warned.

Also Read: Top 5 voices on US Federal Reserve rate hikes and its impact

At its last meeting, the Fed raised funds rate by 25 basis points to a range of 5 to 5.25 percent, the highest since 2007, saying it's "determining" whether additional rate hikes will be needed as it remains "highly attentive to inflation risks."

One basis point is one-hundredth of a percentage point.

"In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments," the Fed said in a statement.

It remains to be seen if the Federal Reserve will go for a much-awaited pause on June 13 after hiking rates continuously in the previous 10 meetings or will the hiking spree continue following robust job data for May.

The US labour market hasn’t shown any signs of slowing down. Employers added 339,000 jobs in May, according to the monthly employment report from the Bureau of Labor Statistics released on June 2. The May numbers are higher than those for April, which were revised upward to 294,000, and way above 190,000 jobs that economists were expecting.

Who is Mohamed El-Erian?

El-Erian is an Egyptian-American economist and businessman. He is the president of Queens' College, Cambridge and chief economic adviser at Allianz, the corporate parent of PIMCO where he was CEO and co-chief investment officer.