Fed Can’t Reach 2% Inflation Without Crushing Economy, El-Erian Says

• • Stable inflation rate should be 3-4%, El-Erian told Bloomberg

  • The Fed is unlikely to change its goal post, he said

The Federal Reserve won’t be able to get US inflation down to its 2% target without “crushing the economy,” economist Mohamed El-Erian warned on Friday, but he said the central bank is unlikely to officially change that goal post. 

“You need a higher stable inflation rate. Call it 3 to 4%,” El-Erian, the chairman of Gramercy Funds and a Bloomberg Opinion columnist, told Bloomberg Television. “I don’t think they can get CPI to 2% without crushing the economy, but that’s because 2% is not the right target.”

His comments come after government data this week showed US consumer prices, or CPI, rose 0.5% in January, the most in three months, and the annual inflation rate came in at a higher-than-expected 6.4% Following the report, a raft of Fed officials said the central bank may need to raise interest rates higher than expectedto try and squelch persistent price pressures.

Calling the Fed “too data dependent,” El-Erian said supply-side developments, including an energy transition, the change in supply chains during the pandemic, a tight labor market and shifting geopolitical issues, necessitate the higher target inflation rate. 

“It’s right to take data into account but you’ve got to have a view of where you’re going,” he said.  

The problem now, El-Erian said, is that the Fed is stuck chasing an elusive 2% goal. 

“You can’t change an inflation target when you’ve missed it in such a big way,” he said. He’s previously cautioned that changing the target would be a hit to the Fed’s credibility. 

When asked on Friday if the Fed could “tolerate” higher inflation, El-Erian said that is “where I hope to go.”