- Mohamed El-Erian told CNBC the Fed's decision to remain ultra-accommodative will prop up stocks throughout 2021.
- However, the economist said he's worried the central bank is making a policy mistake.
- El-Erian said the Fed should have begun tapering asset purchases on Wednesday, not wait until next year.
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The latest policy decision from the Federal Reserve will provide ample liquidity to keep stocks going strong for the rest of 2021, but it may have not been the right move for the central bank, according to economist Mohamed El-Erian.
The Allianz chief economic advisor and Gramercy Fund Management chair told CNBC on Thursday that he's "really worried about the risk of a Fed policy mistake."
He acknowledged that the central bank's decision to remain ultra-accommodative for the foreseeable future will prop up stocks for the rest of the year, but that will continue to encourage financial exuberance in markets and pose a problem for financial stability "down the road."
"If you're in the equity market, this is not dramatic because the equity market, in my opinion, will continue to live in the liquidity moment," El-Erian said. "You're going to have ample and predictable injections of liquidity for the rest of this year."
Where the Fed went wrong was in its decision to hold off tapering asset purchases until next year, El-Erian said. Some investors believe that holding off on tapering will overheat the economy and let inflation run too hot.
"If I were them, I would have started to taper today," he added. " Instead we have a timetable that suggested they'll talk about it and share thinking in September, finalize it in December and initiate it next year. I think that's going to be too slow."
He also said the Federal Reserve was too slow to recognize that there is a lot more uncertainty to their baseline forecast , that inflation is transitory. El-Erian noted that the Fed seems less confident about the prospect of transitory inflation, but he doesn't think the bank is "humble enough" about it.
Fed chair Jerome Powell said observers should increase inflation expectations, which El-Erian agreed with. The economist also agreed with the Fed's statement that the outlook for the economy is better than it was in previous meetings.
On Wednesday Federal Reserve officials brought forward their interest rate hike plan, with more officials than at the last meeting signaling rate hikes in 2023. El-Erian also agrees with this.
The central bank previously placed its first forecasted rate hikes past 2023, signaling it was willing to let inflation run hot to let the US economy recover faster.
The FOMC also elected to hold rates near zero and make no changes to its asset purchase program. The Fed's statement also re-affirmed the belief that the recent spike in inflation is transitory. Stocks ticked lower after the decision but have largely recouped those losses.