Fed policy has rocked markets and the coming rate hikes make the risk of recession ‘unsettling,’ says top economist Mohamed El-Erian

• Mohamed El-Erian warned that the Fed faces headwinds as it steers the economy through a more hawkish policy environment.
• "The risk of recession associated with this is unsettling," El-Erian wrote in the Financial Times. 
• El-Erian noted though that a correction is overdue, but the Fed will need to luck to navigate the transition. 

As the Federal Reserve pivots to a more hawkish policy path after years of propping up the economy during the pandemic, top economist Mohamed El-Erian is forecasting heavy volatility and a potential recession ahead. 

Historic inflation has forced policymakers to shift gears, the economist explained in a Monday op-ed column in the Financial Times, and central bank tightening will add pressure to an already-slowing economy. 

"[The Fed] will need to move aggressively in hitting the brakes, including by 'front-end loading' rate increases as it simultaneously starts to reduce a bloated balance sheet that expanded to a staggering $9tn," El-Erian wrote. "The risk of recession associated with this is unsettling." 

El-Erian noted that, already, the threat of stagflation is transitioning into a baseline scenario, stemming from misguided Fed policy. 

The country will see its monetary and fiscal drivers of growth rapidly deteriorate, El-Erian said. "Policymakers will need a rare mix of skill, luck and time to soft land both an economy and markets conditioned by once-unthinkable levels of policy stimulus."

Meanwhile, China's zero-COVID policies, a potential EU oil embargo, and energy supply-chain snags pose external headwinds to the global economy, El-Erian said. These add further risk to markets. 

However, El-Erian maintained that these corrections are overdue, and will bring financial markets back to a more sustainable state. But for the Fed to guide a return to a stable economy, it will have to exert extreme caution in policy. 

"With the potential coincidence of both demand and supply complications, markets are likely to remain volatile for investors and more unsettling for the real economy," El-Erian concluded.