Muhammad Ali Al-Erian, economic advisor to Allianz SE
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The US Federal Reserve has become too dependent on data and has lost its overall strategy, Mohamed El-Erian, chief economic advisor at Allianz, said on Friday.
The economist told CNBC that a longer-term, more strategic outlook could see policymakers settle on a new inflation target closer to 3%.
“Instead of being strategic, the Fed has become overly data-driven and has turned into a theatrical commentator,” El-Erian told CNBC's Steve Sedgwick at the Ambrosetti Spring Forum in Italy.
He continued: “This is not the role of the Fed.” “The Fed should be strategic, and the Fed should provide a strategic anchor and stabilizer.”
“The mistake they might make is that this time they will end up being too stringent,” he said.
The US Federal Reserve did not immediately respond to CNBC's request for comment.
El-Erian's comments come on the heels of a recent group of Fed policymakers who have begun talking conservatively about interest rate cuts.
Federal Reserve Chairman Jerome Powell said on Wednesday that the bank will need more evidence to assess the current state of inflation, casting doubt on expectations for an interest rate cut in June.
A day later, Minneapolis Fed President Neel Kashkari said he questioned whether the central bank should cut interest rates at all if inflation remained flat, causing markets to tumble.
El-Erian said the comments were an example of the Fed's “overreaction to the data” and said it should take a more comprehensive view of the economy.
However, he noted that policymakers' hawkish approach could be a signal that they are considering the possibility of setting a new normal inflation target.
“The way to discuss it politely is not to say, ‘Let’s change the inflation target,’ but to say, ‘Let’s get to 2% somewhere in the future,’” El-Erian said. Let's chart a course.” He added, “This may prove that the economy is stable near 3%. “I don't think this will weaken inflation expectations.”
In an attempt to drag inflation down towards its target, the Fed has raised interest rates a total of 11 times over the past few years to a target range of 5.25% to 5.5% – the highest level in more than 22 years.
