El-Erian: Market's 'Outsized Reaction' to Inflation Data Came After Getting 'Carried Away'

“I mean, we were at remarkable growth levels. Third quarter, almost 5%. Fourth quarter, 3.3%. We were an outlier compared to the rest of the world. We’re going to slow. Undoubtedly, we’re going to slow.

“But I don’t think we fall into recession unless we get some sort of disorderly financial adjustment or the Fed makes another policy mistake,” El-Erian said. “There is inherent strength in this economy. And that inherent strength has carried us through some pretty difficult geopolitical and political circumstances.”

A mistake would be the Fed staying “too tight for too long,” he explained.

If the central bank is so scared because it was late in addressing inflation, “because they communicated poorly, because their forecasts were wrong, that they’ve been so shaken up that they end up staying too tight for too long,” he said.

Waiting until June to start cutting the Fed’s benchmark interest rate would be fine, “but if, for example, we’re having this conversation in September and they haven’t cut yet, then I think that will constitute a policy mistake,” El-Erian added.

“Look, I’ve been with you consistently for at least six months saying we’re not going to get the sort of rate cuts that the market had priced in, and we’re not going to get it as early as March. June and three cuts, it’s much more realistic. Now, if the Fed delays much longer than that and doesn’t come through with three cuts, then that would be the policy mistake.”

Photo: Bloomberg