It doesn’t take much to realize that America’s economy isn’t exactly doing too well at the moment. Inflation is here, causing prices of even the most items to rise tremendously. Grocery, energy, and rent bills are nearly double in some areas. And don’t even get me started on how ridiculous gas prices are right now.
But what’s even worse about all this is that the upward trend of prices is not likely to stop or really even slow much in the future months. In fact, according to an increasing number of financial and economic experts, a recession is right around the corner. That is if the Federal Reserve continues its practices throughout the last couple of years.
The sad part is that most of those same economists agree that all of this could have been avoided.
Enter Mohamed El-Erian, the chief economic adviser to Allianz.
In a recent episode on CBS News’s Face the Nation, El-Erian told the hosts that the US is headed straight toward a recession. Unfortunately, at this point, there isn’t much we can do about that. But that was not always the case.
El-Erian noted that the upcoming recession was “totally avoidable” and that its threat only exists because of a series of mistakes made by the Federal Reserve. According to El-Erian, these mistakes are so bad they will “go down in the history books.”
He explains that mistake number one of the Fed was to assume that inflation was just a phase we were going through and would quickly and rather simply come out of. As El-Erian noted, inflation is never “transitory” or completely “reversible.”
Now, to be clear, there are things a government or federal agency like the Fed can do to mitigate the threats of inflation, such as raising interest rates and taxes.
However, even that action must be done in a timely fashion and with great care.
And that is exactly what El-Erian points out as the next mistake the Fed made. Once they realized inflation wasn’t going away or was “persistent and high,” they didn’t do anything about it. Maybe they weren’t completely convinced it was here to stay for a while. Perhaps, they thought they could just wait it out.
In any case, they didn’t “act,” as El-Erian says.
And that leads us to the last mistake.
As I mentioned above, there are things the Fed can do to ease inflation. And now that they’ve realized that they must, they have. The problem is that they are essentially overcorrecting at this point, which could send our economy spiraling even more, making a recession that much more likely.
It’s kind of like driving a car in the rain. Braking too hard on wet pavement is just dangerous and could very well send your vehicle careening in the opposite direction or straight over a cliff.
But according to El-Erian, that’s exactly what the Fed has done. “They are slamming on the brakes this year, which would tip us into a recession….”
Again, he noted that this decision would “go down” as a massively grave error.
And he’s definitely not the only expert who agrees.
Even Federal Reserve Chair Jerome Powell has hinted that our economy should no longer be preparing for a “soft” or even “soft-ish” landing. Instead, he’s certain we will experience some “pain.”
Basically, it’s a classic case of not paying attention or not caring until too late and then overreacting.
Jeremy Siegel, a University of Pennsylvania’s Wharton business school professor, has also blasted the Fed for slamming the brakes. He even said that the Fed’s mistakes of the last two years are the “biggest” in the agency’s entire 110-year history. (You know, the years Joe Biden has been at the helm.) And Tesla CEO Elon Musk says that he agrees.
Raising interest rates is one thing, but doing so in the fashion that the Fed has done over the past couple of months is only going to make things worse. What they should have done was started raising rates or making moves to slow inflation, first, when it first started to appear, and second, in small bits at a time.
Now, we have interest rates jumping a whopping .75 percent overnight. And a couple of months later, another jump of the same increment. And given that unemployment has begun to fall, the Fed could choose to raise rates again.
As El-Erian said, all of this was avoidable.