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Investors are right to worry about a US recession as consumer confidence tumbles, top economist Mohamed El-Erian says

Mohamed El-Erian is chief economic adviser at Allianz.

REUTERS/Shannon Stapleton

  • Investors are right to be worried about a US recession as consumer and business confidence falls, Mohamed El-Erian has said.
  • He wrote in the FT that clouds are gathering over the economy and the Fed will find it hard to navigate the storm.
  • The economist said the Fed was late to respond to inflation, and its interest rate hikes may tip the US into recession.

Investors are right to be worried about a US recession as consumer and business confidence falls, and the risk of the Federal Reserve making a mistake rises, according to top economist Mohamed El-Erian.

He wrote in the Financial Times that clouds are gathering over the US economy, and financial markets could be set for another period of volatility as the Fed tries to navigate the storm.

Stocks and bonds have already fallen sharply this year as inflation surged around the world, and as central banks have been forced to hike interest rates, after wrongly predicting that price rises would cool on their own.

The US benchmark S&P 500 stock index has fallen just under 20% so far in 2022. Meanwhile, the yield on the key 10-year US Treasury note, which moves inversely to the price, has shot up from around 1.63% to 3.16%.

“The markets are right to worry about a higher risk of recession. While the US labour market remains strong, consumer sentiment has been falling,” El-Erian, the former CEO of Pimco, wrote in the FT on Wednesday.

“With indicators of business confidence also turning down, there is growing doubt about the ability of the private sector to power the US economy through the major uncertainties caused by this phase of high inflation.”

On Tuesday, the Conference Board’s consumer confidence index showed another fall in June, coming in worse than expected to hit a 16-month low of 98.7.

El-Erian, who is now chief economic advisor to Pimco’s parent company Allianz, has long criticized the Fed for reacting too late to rising inflation.

He repeated his criticism on Wednesday, saying the US central bank is now scrambling to get a grip on inflation in a way that poses risks to the economy. 

The central bank hiked interest rates by 75 basis points earlier this month for the first time since 1994. But El-Erian said it may have to cut them by the end of the year if growth slows sharply.

“Other drivers of demand are also under threat,” he said. “The fiscal policy impetus has shifted from an expansionary to contractionary stance and exports are battling a weakening global economy. With all this, it is not hard to see why so many worry about another Fed mis-step tipping the economy into a recession.”

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