The following is a transcript of an interview with Mohamed El-Erian, chief economic adviser to Allianz, that aired Sunday, June 12, 2022, on “Face the Nation.”
JOHN DICKERSON: We now want to go to Mohamed El-Erian. He’s the chief economic adviser at Allianz, a financial services company and the president of Queens College in Cambridge. Mohamed, good morning.
CHIEF ECONOMIC ADVISER OF ALLIANZ MOHAMED EL-ERIAN: Good morning.
JOHN DICKERSON: Well, let’s start with inflation where everybody else is starting. It’s the reported the highest level in just over 40 years. How did we get here? And are things going to get worse?
EL-ERIAN: We got here because we got a combination of things happening. Of course, we know about the Ukraine war, we know about the energy transition, also the Federal Reserve mischaracterize inflation and fell behind. And all these things came together and are feeding now this everything inflation, the price of nearly everything is going up. And it’s making us feel really insecure.
JOHN DICKERSON: There was some hope in some quarters, it may have been motivated reasoning, but there was some hope that inflation might be turning around, might be getting- the picture might be getting better. So give us your sense, was that hope misplaced? Or is this a sign of how hard it is to predict where we are in the economy at this moment?
EL-ERIAN: It’s both. There was hope initially, that it is transitory, meaning temporary and quickly reversible. There was hope, as you pointed out, that it had peaked. I never shared those hopes. I think you’ve got to be very modest about what we know about this inflation process. And I fear that it’s still going to get worse, we may well get to 9% at this rate.
JOHN DICKERSON: I want to get back to that point about modesty. But- But staying on inflation. How much is this a part of what’s domestic US issues? You mentioned some of them, how much of it is- is what’s happening overseas.
EL-ERIAN: It started mainly external, exogenous, if you like, things that we imported, but then the Federal Reserve did not react. It mischaracterized what inflation is and it fell behind. And the lessons of history is, once you fall behind, you lose the ability of the first best response, you end up in this awful situation that we’re in today, where you need to make a choice. Do you slam on the brakes hard to control inflation and risk of recession? Or do you just tap on the brakes and risk inflation lasting much longer than it should?
JOHN DICKERSON: So it- does that mean the Federal Reserve is in the second best response? Or are they in the third or fourth best response?
EL-ERIAN: Well, the problem for us all is their far away from the first best response. I mean, what makes this very frustrating is it was partially avoidable. This is going to have enormous economic, social, it hits the poor, particularly hard institutional and political consequences. And most of it could have been avoided, had early actions been taken.
JOHN DICKERSON: Looking at what the Federal Reserve is doing, raising rates to try to push down on demand. How is that story going? And we’ll have these new numbers- how do you think these new numbers will affect what the Federal Reserve is going to do going forward?
EL-ERIAN: So it’s not going well so far, because the Fed is yet to explain to us why it got its’ forecast so wrong for so long, the European Central Bank, we- they were in the same position, they explained why. And that’s important, because until you regain credibility, you cannot get on top of inflation expectations. We should look the Fed to increase by at least 50 basis points this coming week.
JOHN DICKERSON: Those expectations the- the University of Michigan consumer sentiment survey showed that people’s fears about inflation in the future was going up. Is that related to that lack of confidence in the Feds ability to bring prices down?
EL-ERIAN: It is. Long term inflation expectations are now 3.3%, the highest we’ve seen them for 15 years. People are losing confidence in the ability of the Fed to get a handle on- on this disinflation process.
JOHN DICKERSON: So Mohamed implicit in everything you’ve been saying and we’ve been talking about is the murkiness of the picture. Economics is always a little murky, are we at an extra murky period right now? And does that mean all policymakers are essentially flying if not blind, they’re- they’re- they’re dealing with something we’ve never seen before and therefore, humility is even more called for in policy prescriptions?
EL-ERIAN: So humanity is totally called for, you know, I was very puzzled when a year ago so many people were so confident that inflation was transitory. There was so much we didn’t understand about the post COVID inflation, that humility would have been a good idea. Unfortunately, today, there’s a few things we know for sure. This inflation is hurting all Americans, and it’s hurting the poor particularly hard, that we know for sure. Second, the longer it lasts, the more it’s going to create, demand destruction, meaning that the average American not only get hit by higher prices, but they will start worrying about their income. And that is not a situation that we really want to be in.
JOHN DICKERSON: If- if that’s what’s facing the American consumer or the American public, what’s your sense- The Economist had a piece about how CEOs did not come up in an age of hyperinflation, that this is the first time for businesses to deal with- with an inflationary moment. How does that change the toolkit that businesses have to use to face the economic conditions today?
EL-ERIAN: Well they’ve got to be both more resilient and more agile, more resilient, and be able to absorb the higher costs, and more agile in knowing how much of this they can pass on. It is also difficult for households, we haven’t had to deal with this amount of inflation. So it’s putting everybody out of their comfort zone. And that’s an additional worry that we may not know how to react quickly enough and we may create a problem- create a deeper problem. That’s why policy leadership is so critical at this stage.
JOHN DICKERSON: So I’m going to ask you to do- give me the- the darkest picture as you see it. And then perhaps the most optimistic let’s- let’s start with the- with the darkest in terms of how long the economic difficulties might be with us, and what they might look like if- if things continue to go in a darker direction?
EL-ERIAN: So we’re now in a period of stagflation, meaning lower growth and higher inflation, the darkest period is that inflation persists, heads to 9%, people start worrying that it’s gonna go to 10% and next thing, you know, we end up in a recession and that would be tragic if that were to happen. Because again, it is the most vulnerable segments of the population that get hit hard. What’s the best, is that the Fed regains control of inflation narrative, and we have what’s called a soft landing, inflation comes down without us sacrificing growth too much. Unfortunately, the balance of risks is tilted in the negative way, right now.
JOHN DICKERSON: Let me ask you about stagflation, a word we hear a lot, feel free to define it a little bit more and let me ask you this question. I thought that stagflation included also a piece of high unemployment, we don’t have high unemployment. So why isn’t that a possibly bright sign?
EL-ERIAN: Oh, that’s a really good sign. We have a strong labor market. And that’s what’s keeping us away from a recession right now. That’s why recession is a risk scenario, not a baseline. The one bad thing about our labor market is that we don’t have enough labor force participation. We don’t have enough workers, we have twice as many jobs that are open that there are workers and what we need is more workers entering the labor force that would help tremendously with our economic outlook.
JOHN DICKERSON: In terms of options, we’ve talked about the Fed, what other policymakers or areas of- of help might come to- to fix the economic situation that America faces?
EL-ERIAN: So number one, is as we talked about the Fed regaining control of inflation. Number two is focusing more fiscal support on the most vulnerable segment of the population. Number three are what we call restructuring measures, increasing productivity and labor force participation. And finally, let’s not forget about financial markets. The last thing we want is financial instability, to undermine economic prosperity. So we need more focus on financial stability.
JOHN DICKERSON: Can I ask you just about the labor force participation piece? What does that mean exactly?
EL-ERIAN: So for example, better childcare would encourage more women to come back into the labor force, retraining and retooling would allow more people to enter the labor force. We have the people, they are just out of the labor market, either by choice or by necessity, and anything we can do to re-engage them is a win-win.
JOHN DICKERSON: All right, Mohamed El-Erian. Thank you so much for being with us. We’re gonna be talking to you again, I’m, I’m certain of that thanks again.
EL-ERIAN: Thank you.
JOHN DICKERSON: And we’ll be right back.