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- Mohamed El-Erian says inflation is not "transitory" like Jerome Powell has claimed.
- He cited the multitude of examples, from rising lumber prices to Warren Buffett's "very substantial" inflationary pressure comments in Berkshire's annual meeting.
- The president of Queen's College Cambridge said the Fed needs to start "tapping the breaks" on its dovish policy and asset purchases.
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Mohamed El-Erian says inflation is here to stay and won't be "transitory" like Federal Reserve Chair Jerome Powell has claimed.
In a statement last Wednesday, Powell said the economy and job markets have "strengthened" and that, although inflation has risen, he believes it is due to temporary factors.
El-Erian, a longtime Fed watcher and the current chief economic adviser at Allianz and president of Queen's College Cambridge, disagrees.
El-Erian sat down for an interview with CNBC on Monday and said that he believes inflation will be "persistent" due to a preponderance of evidence from different industries and, now, even Warren Buffett.
"Warren Buffett made it very clear that we are in the midst of an inflationary process," El-Erian said.
The Queen's College President added that he believes the Fed is "pinning itself in a corner by insisting" that inflation is "transitory."
"You just cited examples, I can cite examples, Warren Buffett talked about 'very substantial' inflationary pressure. Price increases are sticking, according to him and many others," he said.
El-Erian, who was also formerly the chair of President Barack Obama's Global Development Council and the CEO/CIO for PIMCO, went on to criticize the Fed for not "keeping an open mind" and said it was hostage to an outcome-based framework.
The Fed uses the monthly core personal consumption expenditures price index (PCE) as its main measure of inflation, and although PCE figures have risen lately, they aren't matching the level of inflation seen in other areas of the markets like lumber or copper.
Core PCE jumped to 3.5% from 1.7% in the first quarter of 2021, marking its second-fastest pace of growth since 2011.
The Fed has maintained that it won't raise interest rates to counteract inflation until the job market fully recovers from the pandemic.
Separately, El-Erian published an opinion column in the Financial Times arguing that the Fed was overlooking evidence that the jump in inflation has to do with "structural changes" because the long-running deficiency of aggregate demand in the US economy appears to be a thing of the past.
The Fed's current framework was designed long before these structural changes emerged, he said, so the central bank should rethink its approach. "It's time for it to taper its markets interventions for the longer-term wellbeing of the economy and the structural health of financial markets."
In his CNBC interview, El-Erian pointed out that jobs numbers are already set to be above where the Fed was anticipating for 2022, so that shouldn't be an excuse for maintaining dovish policy.
"I think what the Fed should do is follow what the Bank of Canada did last week, start tapping the breaks slowly. Get out of this 'We're not thinking about thinking.' Start thinking and give a clear guideline as to when it is you will start tapering a little bit," El-Erian concluded.
