Mohammed El Erian, chief economic adviser at Allianz, reckons the Fed must change course on its inflation targets. Image Credit: Agency

New York: Allianz SE's Mohamed El-Erian said the US Federal Reserve needs to move fast to regain control of the inflation narrative, denouncing Chairman Jerome Powell's prior assurance that price increases are short-term.

"The characterization of inflation as transitory - it's probably the worst inflation call in the history of the Federal Reserve," El-Erian said on CBS's 'Face the Nation'. "It results in a high probability of a policy mistake. So the Fed must quickly, starting this week, regain regain control of the inflation narrative and regain its own credibility. Otherwise, it will become a driver of higher inflation expectations that feed off themselves."

El-Erian has repeatedly said the Fed is underestimating inflation risks as the US economic recovery from last year's pandemic shock accelerates price increases for everything from energy and food to consumer items. The Allianz chief economic adviser said that the Fed can still address the inflation problem if it's honest now about earlier mistakes. He renewed a call for policymakers to "ease their foot off the accelerator" by reducing the liquidity that they inject and cutting support for the housing market.

Priming the housing market

Failure to do so could result in needing to "hit the brake hard" in a few months, which would risk sending the economy into recession, El-Erian said. The Fed had been buying $80 billion of Treasuries and $40 billion of mortgage backed securities every month during the pandemic to help stimulate economic activity that was crushed in the initial lockdown and subsequent uneven recovery, but in November announced plans to reduce that by $15 billion a month.

Economists see last week's inflation report, which showed the cost of living rising at the fastest pace in nearly 40 years, as adding to evidence that the central bank will announce a quickening of that pace at its meeting this week, setting it up to raise rates from near zero sooner as well.

El-Erian said he doesn't believe that the US has passed peak inflation, and that the pace of consumer price increases will remain near current levels for a few months.