- The US economy can potentially dodge a recession, but stagflation is coming, Mohamed El-Erian told Bloomberg TV on Wednesday.
- "What is unavoidable is stagflation. We're seeing growth coming down, and we're seeing inflation remaining high."
- A significant slowdown in economic growth hasn't been priced into the stock market yet, he warned.
The US economy can potentially dodge a recession, but stagflation is coming, Mohamed El-Erian told Bloomberg TV on Wednesday.
"[A recession] is not unavoidable but unfortunately the probability is going up," he said. "What is unavoidable is stagflation. We're seeing growth coming down, and we're seeing inflation remaining high."
The famed economist, who is an adviser to Allianz and chairman at Gramercy Fund Management, also said the stock market has priced in the risks of inflation, higher interest rates and tighter liquidity.
But a significant slowdown in economic growth hasn't been priced into markets yet, and he expects "another leg to come."
Consumers in general are still strong enough to withstand the changing economic environment, El-Erian added, noting that they can rely on built-up savings from pandemic aid. But there are still vulnerable segments of the population, and not enough has been done to protect them, he warned.
He reiterated that the Federal Reserve was too slow to react to rising inflation. While the central bank is turning the corner and recognizing the potential ramifications of its policies, it "still has someway to go."
Fed Chairman Jerome Powell told the Wall Street Journal Wednesday that he would continue raising interest rates until inflation comes down, adding that he still envisions a "softish" landing.
"I would say there are a number of plausible paths to have a soft — as I said softish — landing. Our job isn't to handicap the odds, it's to try to achieve that," Powell said.
El-Erian said stagflation represents the worst nightmare for the Fed as it puts the two parts of its mandate — full employment and stable prices — into direct conflict. He thinks Powell and the Fed have a tough decision to make in regards to controlling stagflation in 2022.
"A lot of people say it needs luck and skill. It needs a lot of luck at this point," El-Erian said.