2 Causes Why “Recession Dangers Are Growing”: Mohamed El-Erian

Veteran economist Mohamed El-Erian says the risk of a recession “is getting bigger and bigger.”

“My definition of recession is a holistic definition. That’s well above two quarters of negative GDP,” said Allianz’s chief economic adviser and former PIMCO managing director.

“The labor market is too strong. Consumer spending is too high. Business balance sheets are too strong. We’re just not in a recession. Is the risk of a recession high? Yes, it’s high and getting higher,” El-Erian said on Yahoo Finance’s “Influencers with Andy Serwer.”

He pointed out that the Federal Reserve is tightening monetary policy to slow the economy. The International Monetary Fund’s latest forecast shows a slowdown in all major areas of the global economy, with conditions described as “gloomy and uncertain”.

El-Erian said four steps are needed to keep the U.S. out of recession.

“First of all, we have to control the beast of inflation,” El-Erian said.

“This is the Fed that needs to act, not just to tighten its monetary policy, but also to restore credibility.” Her further guidance is almost meaningless at this point,” he said.

In July, the Federal Reserve announced a 75 basis point increase in interest rates. Fed Chairman Jerome Powell said the central bank would be “data dependent” on its next steps — essentially forgoing further guidance. Markets focused on Powell’s unscripted comments.

El-Erian also said that the government must “target fiscal policy more to protect the most vulnerable sections of our society. This has huge economic, social and political consequences.

He also suggested “growth-promoting, productivity-promoting reforms that need to be implemented, including increasing labor force participation” to improve supply chains.

“Finally, let’s not forget about financial stability. Let’s not forget how risk has not only shifted and shifted from banks to non-banks, but non-banks have been encouraged by years of zero interest rates and massive and predictable injections of liquidity to take risks well beyond what is normal,” said El-Erian.

“So the non-banking sector is still on the sidelines. And we have to keep an eye on the risks to financial stability because it could come back and hurt the economy,” he added.

Ines is a market reporter covering stocks. Follow her on Twitter @ines_ferre

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