Leading economist Mohamed El-Erian is calling for sweeping reforms at the Federal Reserve, warning that the central bank’s credibility is at risk following a prolonged period of policy missteps and internal dysfunction in recent years.
Fed Admits To Making Mistakes
El-Erian, the Chief Economist at Allianz, said that the current focus when it comes to the Fed is on the short-term, such as whether to cut rates in December, or who will be the next Fed Chair, which he said misses the broader point, while appearing on CNBC’s “Squawk Box” on Monday.
He said the larger question is, “How will this Fed be reformed?” adding that “This Fed went to sleep,” a critique aimed at the central bank's recent forecasting missteps and operational shortcomings.
Citing Cleveland Fed President Loretta Mester, El-Erian said her remarks reflect a rare acknowledgment from inside the central bank that “we made mistakes” and need to improve.
He highlighted her call for better forecasting methods, a shift toward scenario-based analysis, greater attention to supply-side dynamics, and a stronger internal compliance culture.
El-Erian urged a shift away from reactive policymaking toward a more strategic vision. “We don't need a play-by-play Fed. We need the Fed to cool it,” he said, while also flagging the extreme volatility in interest rate expectations as a sign of broken forward guidance.
Fed Accused of Driving Inflation, Inequality
Recently, Treasury Secretary Scott Bessent called for sweeping reforms at the central bank, while accusing it of driving inflation and inequality.
“The Fed must change course,” he said, while adding that its policies in recent years have “enriched the rich at the expense of the poor,” in addition to causing the U.S. housing affordability crisis.
Economist Judy Shelton, a former advisor to President Donald Trump during his first term, held similar views, saying that the challenges facing the Fed go beyond just short-term rate decisions, while pointing to systemic issues within the institution itself.
“We're really looking at much deeper problems at the Federal Reserve, its models, its constructs, the way the Federal Reserve staff choreographs the meeting,” she said.
Rate Cut Probabilities Surge
According to the CME Group’s FedWatch tool, the probabilities for a rate cut during the Federal Open Market Committee meeting next week now stand at 87.2%.
This marks a dramatic turn from a nearly 70% probability of their being no cuts just two weeks ago, which El-Erian had referred to as “wild volatility.”
Last month, in a post on X, he said that this was “the opposite of the ‘predictability and stability’ the Fed usually strives for,” while blaming it on the prolonged government shutdown, “a dual-mandate squeeze,” as the Fed is forced to contend with rising inflation alongside a cooling labor market, which is made worse by a “lame-duck Chair.”
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