A 2nd straight quarter of GDP contraction shows the Fed is on the back foot in its fight against inflation, says Mohamed El-Erian

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New data showing a second straight GDP decline is a sign the Federal Reserve is behind in its battle against inflation, Mohamed El-Erian says. El-Erian thinks the Fed may have waited too long to raise rates, making a soft economic landing unlikely. The famed economist has warned for months that the central bank tightened policy too slow to avoid a recession. Loading Something is loading.

GDP slipped for a second consecutive quarter, sparking more recession anxiety as the market wonders if the Fed is doing enough to tame 41-year-high inflation.

For reknowned economist Mohamed El-Erian, it could be a sign that the central bank has been too passive in the fight to squash the sky-high inflation, meaning that a recession could already be here, or is looming in the imminent future.

“This is an economy that is weakening at a much faster rate than people expected,” El-Erian said in an interview to CNBC, pointing to the 0.9% annualized decline in GDP reported by the Bureau of Economic Analysis on Thursday. It’s the second straight quarter of GDP decline, following a 1.6% stumble in the first quarter this year.

That also means the economy meets the technical definition of a recession, sparking some debate on whether the US is already in a downturn despite a strong labor market. 

But “whether we are in a recession or not, it’s not as interesting as the fact that [the economy is] weakening really fast,” El-Erian said about the data.

He added that if the economy weakens faster than the Fed can bring down inflation, it suggests that a recession could be imminent if it isn’t already here, making the odds for a soft landing even narrower for the central bank.

At a press hearing yesterday, Fed Chair Jerome Powell acknowledged that inflation was beginning to show signs of rolling over, but El-Erian noted that in an unscripted comment, Powell said he believed inflation was at the “neutral rate,” a rate where monetary policy isn’t accommodating or restrictive, suggesting that Fed officials believe inflation will come down in time and that the bulk of the inflation fight is already behind them.

El-Erian is more skeptical. In an op-ed for Bloomberg on Thursday, the economist said he had ‘a hunch’ that inflation was still below neutral, floating the possibility that the Fed waited too long to begin hiking rates to make a soft landing plausible. That fits with his previous criticisms of the central bank, having warned the public for months of a recession as inflation continued to soar and the Fed showed meekishness in its monetary stance, hiking up interest rates .25-percentage points in March before aggressively hiking by .75-percentage points in June and July.

“Yes, inflation is going to come down on a headline level, but it’s not going to come down fast enough given that the economy is weakening, and that is going to put the Fed in the same dilemma that it’s been in for the past few months,” El-Erian warned.

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