Powell has the chance to resolve the disconnect between the Fed and markets this week, and the US can avoid a downturn with the right policy moves, Mohamed El-Erian says

Fed Chair Jerome Powell
Federal Reserve Chair Jerome Powell.
Win McNamee/Getty Images

  • Fed Chairman Jerome Powell has the chance to fix the disconnect between the markets and the Fed, Mohamed El-Erian told CNBC. 
  • Forward guidance "has really been discredited under this Fed," according to Allianz's chief economic adviser. 
  • Global markets will be watching Powell's Jackson Hole speech set for Friday. 

In a key week for US stocks, Federal Reserve Chairman Jerome Powell has the opportunity to get market investors on the same page as the central bank's agenda to bring down inflation that will likely be at the cost of short-term economic growth, economist Mohamed El-Erian said Monday. 

The chief economic adviser at Allianz said in a CNBC interview that Powell has the chance to mend the "disconnect" on monetary policy between the market and the central bank this week at the Fed's symposium in Jackson Hole, Wyoming.  

"Chair Powell has two choices: either to let that disconnect continue or try to resolve it. And if he tries to resolve it, he either resets the market's expectations or he acknowledges that the market is right because we're going to have a significant economic slowdown. It's going to be up to him," said El-Erian. 

Powell on Friday is scheduled to speak at the economic symposium hosted by the Federal Reserve Bank of Kansas City. US stocks had surged this summer in a bear-market rally, fueled by an interpretation among many investors that Powell had signaled the Fed will pivot toward cutting interest rates as US economic activity slows down. The Fed is likely to raise interest rates again in September after hiking rates four times this year to tamp down hot inflation. 

Powell "should shy away from what I call spurious precision," said El-Erian. "I think forward guidance has really been discredited under this Fed. What he should come out and say is, 'I'm gonna do everything I can to put the inflation genie back into the bottle that is critical for our long-term economic well-being,'" the economist said. 

The Fed chairman would need to acknowledge that such an inflation-fighting stance may result in a much weaker economy but that the hawkish moves would benefit the economy over the long-term, El-Erian said. "This other fairy-tale economics isn't helping anybody." 

The US "has the potential to avoid a significant downturn if we get the policy right," said El-Erian, who is also chair of emerging-markets-focused Gramercy Fund Management. 

There's also been a disparity in views on recession risks between commercial bank CEOs and economists at the financial institutions as each camp looks at economic activity in the US with different lenses. 

"I think if it was just about the rest of the world, the recession calls will be all over the place. Europe is looking terrible and the further hike in gas prices is not going to help much. China is clearly struggling," he said. "So you get these incredible, disjointed messages from within the same institutions because they have different views about the US." 

JPMorgan said Monday it expects the Fed to raise rates by 75 basis points at its meeting on September 20-21. Inflation in July rose 8.5%, cooling from 9.1% in June.

Powell is slated to speak at 10 am Eastern on Friday. 

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