El-Erian Says Calling Inflation ‘Transitory’ Was Likely Fed’s Call Worst Ever

Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen have finally dropped the word “transitory” to describe inflation but critics say the Fed still is not moving fast enough to counter inflation.

“The characterization of inflation as transitory, is probably the worst inflation call in the history of the Federal Reserve,” said Mohammed El-Erian, chief economic adviser for Allianz, on CBS’s “Face the Nation” program on Sunday.

The Labor Department on Friday reported that consumer prices rose by 6.9 percent in the 12 months ending November, the fastest clip for inflation in 39 years. The Federal Reserve’s monetary policy committee is meeting this week to assess the economy and set the path for monetary policy going into the new year.

El-Erian said that the Fed’s underestimation of inflation “results in a high probability of a policy mistake.”

“So the Fed must quickly, starting this week, 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 said.

In an opinion piece published at Bloomberg, El-Erian wrote that the Fed must go beyond announcing that it will double the pace of the winddown of its bond-buying program.

“The Fed has a simple choice this week. It can either continue with its gross mishandling of inflation or, instead, start regaining credibility and its control of the narrative on inflation and monetary policy,” El-Erian wrote.