Fed Should Resist Further Rate Hikes, Mohamed El-Erian Warns

Mohamed El-Erian has concerns about further interest rate hikes by the Federal Reserve. He believes that raising rates again could become 'dangerous' and attack inflation that monetary policy didn't create, while putting unnecessary pressure on an economy already losing momentum.

El-Erian thinks Kevin Warsh should stop at one rate hike. The Fed raised its federal funds rate to 3.75% to 4%, allowing Warsh to reassert the Fed's commitment to its 2% inflation target without surprising a market that had spent weeks demanding exactly that response.

The current inflation pressure comes from forces the Fed can't directly control, including energy costs and trade disruptions. Higher short-term rates can suppress demand, employment, and investment but can't produce more oil or repair a supply shock.

Consumers are already absorbing the consequences from both directions. El-Erian notes that more than five years of above-target inflation have produced a cumulative price shock, while higher bond yields have pushed borrowing costs upward across mortgages and other forms of credit.