Allianz Chief Economic Advisor Mohamed El-Erian says that the Federal Reserve’s response to inflation will cause the prices of cryptocurrencies, like bitcoin, to “go higher.” He noted: “That’s what you get when you’ve waited too long to recognize what inflation is and to take action.”
Predictions by Allianz’s Chief Economist
Economist Mohamed El-Erian discussed the U.S. economy, the markets, and the Federal Reserve’s response to inflation in an interview with CNBC Monday.
El-Erian is the president of Queens’ College, Cambridge University. El-Erian is the Chief Economic Advisor for Allianz. Allianz is the corporate parent to PIMCO. He was also the CEO and cochief investment officer.
He explained:
Three issues are apparent to me, and the market has recognized this. We have persistent inflation at a high level. The Fed is far behind at two, and the path to orderly disinflation seems very narrow.
The economist stated that these are the reasons why companies now have questions about growth. Goldman Sachs, the investment bank, said Monday that there’s a 35% chance that there will be a recession over the next 2 years. “That’s a meaningful number, 35%,” El-Erian stressed.
“So, the big question is: can we navigate this inflation growth landscape that has become much more difficult?” he noted, adding that “Bank CEOs, they are worried about the macro environment.”
Value Restoration
After the sell-off of some major crypto currencies over the weekend, the chief economic advisor at Allianz was asked what the future outlook is for the cryptocurrency market.
“I think the concern for the crypto people is that this decline is happening at a time when gold is up and hitting almost $2,000,” he opined. “Because the big argument for crypto is it’s a diversifier. At the time of inflation, it’s attractive. And recently, crypto hasn’t played that role.”
The economist explained: “There’s a reason why, and that’s because crypto, unlike gold, benefited enormously from all the liquidity injections. So what you’re getting in crypto is a tug of war between a recognition that liquidity is going out from the system as a whole and attractiveness as a diversifier. So far, it’s the liquidity element that is winning out.”
He further detailed:
What you are seeing across the board is the restoration of value, and that’s a good thing. You’re seeing it in stocks, you’re seeing it in bonds, you’re seeing it in crypto.
“We are just adjusting to a paradigm in which liquidity is no longer abundant, and is no longer predictable,” he added.
El-Erian reiterated: “So I view this as part of the restoration of value that we are seeing in quite a few assets, not all of them yet, but quite a few already.”
The Fed’s Inflation Target and Crypto Market
El-Erian was also questioned about whether the Federal Reserve would change its inflation target or what it would look like.
“What will force them to change their target is the recognition that by being so late, they can’t get to their target and their credibility is threatened,” he replied. “They would also worry that by hitting the brakes too hard, they may push this economy not just into a short-term recession but into a longer-term recession.” He continued: “They will be very tempted and lots of people will push them to raise the target from 2% to 3% as a way out. Now, that’s not going to be an easy way out, and it’s going to be incredibly controversial.”
El-Erian opined: “That’s what you get when you’ve waited too long to recognize what inflation is and to take action. We should have started QT last year; we didn’t. And we are now seeing the consequences of the Fed being so late.”
He was then asked by a reporter what the Fed’s actions would have on crypto and gold. His response was:
Both can go higher.
Is El-Erian right? Please comment below.
Images CreditsShutterstock. Pixabay. Wiki Commons
DisclaimerInformational: This article is not intended to be a solicitation or offer to sell or buy any product, service, or company. Bitcoin.com doesn’t offer investment, tax or legal advice. The author and the company are not responsible for any loss or damage caused by the content or use of any goods, services, or information mentioned in the article.