El-Erian: "The Economy Has Lost Its Anchor... Concerned About a Recession in 2024"

"We have lost the anchor of the economy. There are concerns about a recession in 2024."

Mohamed El-Erian, a prominent Wall Street economist and Chief Economic Advisor at Allianz Group, stated in an interview on the Wall Street Journal (WSJ) podcast released on the 8th (local time), "Savings are depleted, credit costs are rising, mortgage costs are increasing, and fiscal resilience is lost?all of these are eroding economic resilience."

Advisor El-Erian said, "Throughout 2023, while people were saying we might fall into a recession, I was holding back. I said there was no reason for a recession because the U.S. economy was fundamentally strong," adding, "Now I am more worried about 2024." He cited as reasons ▲the lagged effect of large interest rate hikes ▲depletion of savings ▲a more uncertain global situation.

When asked what the recent sharp rise in government bond yields tells us, he diagnosed, "It says confusion." Contrary to earlier simple interpretations in the bond market?that in 2022 central banks would aggressively raise rates, and in 2023 rates would remain high for a longer period?El-Erian pointed out, "Now we are worried about fiscal deficits, bond issuance, and who will buy them."

In particular, El-Erian pinpointed a more fundamental issue: "The general consensus about the U.S. economy over the past 15 months." Despite being the world's largest economy with the most mature institutions, there has been no agreement on economic outlooks, moving from "soft landing to hard landing, to no landing, to hard landing, to crash landing, back to hard landing, and then to soft landing," calling it a "surprising sequence." He added, "This tells us we have lost the anchor," diagnosing, "We have lost the anchor of the economy. We have lost the policy anchor and the technical anchors as well."

He also emphasized the importance of curbing inflation. He said, "Inflation determines the moves of the Federal Reserve (Fed)," adding, "The Fed is the most important central bank in the world, and if they repeat policy mistakes, the Fed alone can make the economy difficult." Furthermore, he noted, "Inflation hits the poor hard. It brings not only economic but also social and political consequences," emphasizing, "Without price stability, high growth is difficult." Persistent inflation ultimately erodes purchasing power and dampens both consumer and business sentiment.

On this day, El-Erian also criticized the Fed for making as many as six major policy mistakes. These included diagnosing inflation as transitory, not acting quickly enough despite the situation, failing in forecasts in the same direction, supervisory failures that led to the collapse of small and medium banks, communication gaps that increased volatility, and ultimately, claims that all of this resulted in failures of credibility and accountability surrounding the Fed.

He mentioned an anecdote about the CEO of Silicon Valley Bank (SVB), which went bankrupt earlier this year, who said in Congress, "I trusted the Fed. I believed inflation was transitory as the Fed analyzed," emphasizing, "This shows the Fed has lost trust." He also pointed out that although the Fed sets interest rates, the market anticipated different paths, causing enormous volatility, which is also a matter of trust.

When asked if he feels the Fed is doing well now, he replied, "It is in a better position after the big mistake of calling inflation transitory," and assessed, "Fortunately for everyone, the U.S. economy has been remarkably strong and resilient."

This content was produced with the assistance of AI translation services.