- Fed Chair Powell "finally sent the correct message," to markets about inflation, Mohamed El-Erian said.
- Investors are taking notice as Powell mentioned inflation 45 times during his eight minute address Friday.
- But Powell didn't address policy errors in his speech, the Allianz advisor said.
Federal Reserve Chair Jerome Powell has sent the right message to markets about the central bank's resolve in tamping down inflation, according to top economist Mohamed El-Erian who also Powell's Jackson Hole speech failed to address past policy mistakes.
"He finally sent the correct message. He should have done that months ago," El-Erian said in a CNBC interview on Monday. "He was unambiguous. He was clear, he stuck to his script and he did it in eight minutes. And the market is starting to realize that when your Fed chair mentioned inflation 45 times in eight minutes, something is changing. That's the good news."
US stocks were falling on Monday, building on Friday's selloff as investors braced for further Fed hawkishness in the wake of Powell's symposium speech in Jackson Hole, Wyoming. Powell said the Fed's fight against high inflation will bring "some pain" to American households as price stability is key to maintaining the strong US labor market.
"The less good news is he didn't deal with the policy errors of the last 18 months," said El-Erian, an advisor at Allianz, the German multinational financial services company that runs bond giant PIMCO.
"[Powell] should do that at some point and he hasn't dealt with the fact that they have a monetary framework that's not fit for purpose," said El-Erian. "If he sticks to his script, we should expect more hawkish talk as we go forward. But there are people who doubt that he will. So that's where the ambiguity is, and that's something that the market is gonna have to navigate through."
El-Erian referenced an earlier Monday interview with economist Jeremy Siegel on CNBC in which the Wharton professor said Powell didn't guide the markets on what inflationary measures the Fed is monitoring. Siegel said the Fed could overtighten policy with recent data pointing to an inflation slowdown.
There have been a number of "disconnects" between financial markets and the Fed and economic data. "All that was a function of communication [by Powell] not being clear," said El-Erian.
"Powell with the Jackson Hole speech had to realign market expectations as financial conditions have loosened significantly at a time when the Fed chair was trying to tighten financial conditions," El-Erian said. "He had no choice. Now the question is does he follow through."
The Fed is widely expected to raise interest rates at the next meeting of the Federal Open Market Committee in September. It has increased the Fed Funds rate four times this year to a range of 2.25%-2.5%.
Key inflation figures eased in July. Headline consumer price inflation was 8.5% and the central bank's preferred inflation gauge, the core PCE index, was 4.6% for July year over year.
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