2 reasons why “the risk of recession is increasingly high”: Mohamed El-Erian
The risk of recession “is getting higher and higher,” says veteran economist Mohamed El-Erian.
“My definition of a recession is a holistic definition. It goes well beyond two quarters of negative GDP,” said Allianz’s chief economic adviser and former CEO of PIMCO.
“The labor market is too strong. Consumer spending is too strong. Corporate balance sheets are too strong. We are simply not in a recession. Is the risk of recession high? Yes, it’s high and growing,” El-Erian said on Yahoo Finance’s “Influencers with Andy Serwer.”
He pointed to the Federal Reserve’s tightening monetary policy in a slowing economy. Recent forecasts from the International Monetary Fund show that all major sectors of the global economy are slowing, calling conditions “bleak and uncertain”.
El-Erian said that to prevent the United States from sliding into a recession, four steps in particular must be taken.
“First and foremost, we need to control the beast of inflation,” El-Erian said.
“This is a Fed that needs to act not only to tighten monetary policy, but also to regain credibility. Its forward guidance right now makes almost no sense,” he said.
In July, the Federal Reserve announced a rate hike of 75 basis points. Fed Chairman Jerome Powell said the central bank would be “data dependent” with its next steps – essentially abandoning forward guidance. Markets rallied on Powell’s unscripted comments.
El-Erian also said the government needs to “target fiscal policy more to protect the most vulnerable segments of our society. This has massive economic, social and political consequences.
He also suggested “growth- and productivity-enhancing reforms that need to be carried out, including to increase labor market participation,” to improve supply chains.
“Finally, let’s not forget financial stability. Let us not forget how risk not only transformed and migrated from banks to non-banks, but that non-banks were encouraged, by years of zero interest rates and massive liquidity injections and predictable, to go far beyond the original habitat to take risks,” said El-Erian.
“The non-banking sector is therefore still out of the game. And we have to keep an eye on the risk to financial stability because it could come back and hurt the economy,” he added.
Ines is an equity market reporter. Follow her on Twitter at @ines_ferre
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