Investors are paying the price for federal policy mistakes, according to Allianz economic advisor Mohamed El-Erian. “This is a two-part political mistake of historic proportions,” the former CEO of bond giant Pimco told CNBC’s “Squawk Box” in an interview Monday. “Part one was being tempted by ‘temp’ and doing nothing,” he added, referring to the term Federal Reserve officials used to describe inflation through most of 2021. “Even in March, they were still buying bonds, just to tell you the size of how late they are. And now in the scramble to catch up, they are climbing hard in a strong economy, which would be the second stage of policy error.” El-Erian spoke less than a week after the Federal Open Market Committee approved a third consecutive rate-setting rate increase of 0.75 percentage points. The cumulative 3 percentage point increase in hikes this year represents the fastest pace of tightening since the Fed began using the overnight money rate as its primary policy tool in 1990. In addition to raising interest rates, the Fed is trimming up to $95 billion per month in Bonds are holdings out of its $8.9 trillion balance sheet. El-Erian said the central bank was unlikely to deviate from the current path. “The problem is that the alternative is not something they like,” he said. “So we will have to move past this historic Fed policy mistake.” There is one bright side to the analysis: the operation will help eliminate distortions in financial markets that were also the product of Fed policies in the other direction. At the start of the Covid pandemic, the central bank cut record borrowing rates to nearly zero and instituted a series of unprecedented liquidity and lending measures that helped avert the initial crisis but will have to be phased out one day. “We were in a very synthetic market [with] Asset allocations are highly distorted. “There have been no meaningful risk factors, people have been pushed to do silly things, and we are in the process of getting rid of this,” El-Erian said. “For long-term investors, we will arrive at a better destination. However, the journey is incredibly bumpy and becomes more roughness with what is happening around the world.”
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