Mohamed El-Erian, chief economic advisor for Allianz SE, speaks during Bloomberg’s fourth-annual Year Ahead Summit in New York, U.S.(Photographer: Michael Nagle/Bloomberg)

El-Erian Says Markets Too Sanguine About Fed View on Instability

(Bloomberg) -- Mohamed El-Erian, Allianz SE’s chief economic adviser, said that investors focused on lower-than-expected inflation shouldn’t overlook the possibility that the Federal Reserve will nonetheless raise interest rates to limit possible disruptions to the economy.

“I suspect the market is too sanguine when it comes to how much central bankers are thinking about the risk of financial instability down the road,” El-Erian said Friday in an interview on Bloomberg Television. “We’re hearing more central bankers talk about the risk of financial instability, and they do care about it because it could undermine future growth.”

Central bankers in the U.S., who have gathered in Jackson Hole, Wyoming, are on guard for potential risks after some expressed concern in their June meeting that “subdued” market volatility could leave the economy vulnerable to shocks. Monetary policy makers have been slow to raise interest rates from record low levels, lifting their benchmark only four times in the past two years as inflation failed to meet targets. Still, unemployment is falling and markets have rallied.

El-Erian said that investors shouldn’t be “excessively obsessed” with low inflation, since that may be due more to structural issues. The Fed should consider tightening policy in December, according to the economist, who is also a Bloomberg View columnist.

Low inflation suggests that policy should “remain looser for longer,” he said in a separate interview on Bloomberg Radio. But “concern about financial instability says, ‘take this window and tighten.’”

Years of monetary easing have buoyed financial markets, with stocks reaching records in the U.S. That’s lead to distorted asset prices, according to El-Erian. He reiterated his call for fiscal policy makers to take a more active role in promoting underlying economic growth in the U.S.

“We do have distorted markets for good reason,” he said. “Hopefully, they can get validated by better fundamentals that result from a policy hand-off, but the prospects for that are not great right now.”

Fed Chair Janet Yellen addressed stability in remarks Friday at Jackson Hole after El-Erian spoke. She said that any changes to regulations should be “modest” since they helped make the financial system more resilient. President Donald Trump’s administration has proposed rolling back regulations that were created after the 2008 credit crisis.