The Fed Is Failing in Four Ways

For an illustration of the inadequate Fed policy anchor, consider the recent implied market forecast of what it will announce on Wednesday. In just a few days, the probablity of te Fed raising by a highly unusual 100 basis points went from insignifican to even odds and then down again to improbable.

The longer the Fed resists the overdue analytical pivot, the more its inflation and growth forecasts will continue to miss the mark, exacerbating the second failure.

For the last few quarters, such projections have been quickly and correctly dismissed as unrealistic by a wide range of economists, market analysts and, even more unusual, former Fed officials. This matters even more now that the U.S. economy is showing signs not just of weakening but also of flirting with a recession.

Third, the Fed must be more agile in its policy responses. It is now widely agreed that, after sticking for way too long to its misguided “transitory” inflation call, it should have responded more forcefully when it finally “retired” this faulty characterization. This was confirmed by former Vice Chair Randal Quarles last week, who also referred to the concern that I and many others hold that the Fed is still co-opted by markets.

Finally, the Fed must be more straightforward in its communication. It seems to remain the central bank in advanced countries that is most prone to, using a phrase from former Chancellor of the Exchequer Rishi Sunak, “fairy tale economics”; and it is the most systemically important of all these central banks.

Regardless of what the Fed does next week, without addressing these four deficiencies, the central bank will continue to lack the credibility needed to avoid being remembered by economic historians as having unnecessarily caused a U.S. recession; having destabilized a global economy still trying to recover from Covid; having worsened inequality; having fueled unsettling financial instability; and having contributed to debt stress in fragile developing countries.

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Mohamed A. El-Erian is a Bloomberg Opinion columnist. A former chief executive officer of Pimco, he is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE; and chair of Gramercy Fund Management. He is author of “The Only Game in Town.”

(Photo: Wei Leng Tay/Bloomberg)