The Fed should wait 'a couple years' before cutting rates as inflation is too sticky, top economist says

• The Fed should wait a "couple years" to cut interest rates, according to top economist Mohamed El-Erian.
• That's because it could take a while for inflation to fall to the Fed's 2% target.
• Cutting rates prematurely raises the risk of stagflation, El-Erian has warned.

The Federal Reserve should wait much longer than markets are expecting to cut interest rates, according to top economist Mohamed El-Erian.

Speaking to Bloomberg on Wednesday, the Allianz chief economic advisor said he believed Fed officials should push back their timeline for rate cuts by "a couple years." That's due to the sticky nature of inflation, he said, suggesting that central bankers risk letting high prices flare up again if they plan on cutting rates soon.

"The underlying inflation rate that is consistent with economic well-being, for now, is somewhat higher than 2%," El-Erian warned, pointing to supply-chain pressures, like the green energy transition and a tight labor market, that are buoying prices in the economy. 

Consumer prices rose 3.2% year-over-year in February. Though that's well above the Fed's target, officials have projected three rate cuts by the end of the year, with markets expecting the first cut in June, according to the CME FedWatch tool.

El-Erian has previously warned of the dangers of the Fed cutting interest rates too early. That could cause inflation to spiral out of control and plunge the US into a 1970s-style stagflation crisis, he previously warned. 

But it's hard to know what the Fed is truly thinking of inflation and its next policy move, El-Erian said. Federal Open Market Committee members just reaffirmed the outlook for three rate cuts in 2024, but the Fed has traditionally been "so data dependent," he noted, referring to the fact that real prices in the economy lag behind the official statistics. 

"The market goes on a roller coaster, and the Fed's role is to be looking at the rollercoaster, not being in the rollercoaster," El-Erian said.

El-Erian was a loud critic of the Fed in 2022, when central bankers began to issue steep rate hikes. Tightening financial conditions that quickly raised the odds of recession, El-Erian warned in 2022. He's since dialed back his outlook for a hard landing, but has warned that serious risks still lie ahead for the economy.