Allianz chief economic advisor Mohamed El-Erian said the Federal Reserve is behind the curve in lowering rates now that the economy is slowing, just as it was tardy in hiking rates when inflation was spiking.
That would mark another policy mistake in recent years. As the economy began to recover from the COVID-19 pandemic, prices began surging, but the Fed was slow to hike rates. When it finally started in 2022, it launched the most aggressive tightening cycle in four decades, though the economy didn’t tip into a recession as was widely expected.
El-Erian’s remarks echo President Donald Trump’s criticism of the central bank. Trump has regularly insulted Chairman Jerome Powell, and even toyed with firing him earlier this year. Meanwhile, he has moved to fire Fed Governor Lisa Cook, who is fighting her dismissal in court.
The Fed should’ve cut rates in July, but Powell’s view of the job market was too narrow and ignored the weakness that was building under the surface, El-Erian said.
The risk with waiting to provide support to a weakening labor market is that it can deteriorate in a “nonlinear” fashion, meaning that job losses can quickly accelerate, he explained.
For his part, Powell has pointed to the unemployment rate, which has been relatively steady for more than year, noting that the supply of workers in the labor market has dropped alongside a decline in demand.
Trump’s immigration crackdown has sent more than 1 million workers out of the labor force this year. As a result, the breakeven level of job gains that are needed to keep unemployment flat is lower than it used to be.
At the same time, Fed’s dual mandate of price stability and maximum employment is forcing policymakers to balance the risks of further stoking inflation, which has been climbing as Trump’s tariffs ripple through the supply chain.
There’s still time for the Fed to correct its mistake, and perhaps cut rates more aggressively, El Erian said. But the risks to the economy are elevated as lower-income households have seen their financial security decline.
“Could they play catch-up? Yes, they could. Hopefully they will, but it’s a more risky operation than a lot of people expect it to be,” he warned.
Similarly, JPMorgan Asset Management chief global strategist David Kelly said rate cuts will reduce interest income for retirees and encourage businesses to hold off on borrowing money and wait for rates to get even lower.
On top of that, lower cuts could also raise fears that the reason the Fed is cutting because it sees a recession on the horizon, Kelly added.
Combined with existing uncertainty over Trump’s tariffs and immigration crackdown, recession fears could act as another drag on the economy, he explained, noting that “the biggest tax the government levies is an uncertainty tax.”
“There is a level of uncertainty here which is just causing people to freeze, and that’s really what you see in the hiring numbers,” Kelly said. “That’s the problem. Businesses aren’t laying off thousands and thousands. They’re just waiting to see, and the three most deadly words in economics are ‘wait and see.’ But when everybody decides to wait and see, what you see is not good.”
