The risk of a recession “is getting higher,” says veteran economist Mohamed El-Erian.
“My definition of a recession is a holistic definition. It goes well beyond two-quarters of negative GDP,” said Allianz’s chief economic adviser and former PIMCO chief executive.
“The labor market is too strong. Consumer spending is too strong. Trade balances are too strong. We’re just not in a recession. Is the risk of recession high? Yeah, it’s high and getting higher,” El-Erian said on Yahoo Finance’s “Influencers with Andy Serwer.”
He highlighted the Federal Reserve’s tightening monetary policy in a slowing economy. The recent forecast from the International Monetary Fund shows that all major areas of the world economy are slowing, calling conditions “bleak and uncertain”.
El-Erian said that to prevent the United States from falling into a recession, there are four measures in particular that must be taken.
“First of all, we have to control the beast of inflation,” El-Erian said.
“That is a Fed that needs to act not only to tighten its monetary policy, but also to regain credibility. His forward orientation right now is almost negligible,” she said.
In July, the Federal Reserve announced a rate hike of 75 basis points. Fed Chairman Jerome Powell said the central bank would be “data dependent” with its next steps, essentially abandoning forward guidance. Markets rallied on off-the-cuff comments from Powell.
El-Erian also said that the government needs to “target more fiscal policy to protect the most vulnerable segments of our society. That has huge economic, social and political consequences.”
He also suggested “pro-growth and productivity-friendly reforms that need to be made, including to increase labor force participation,” to improve supply chains.
“Finally, let’s not forget financial stability. Let us not forget how risk not only morphed and migrated from banks to non-banks, but years of zero interest rates and predictable massive liquidity injections encouraged non-banks to go far beyond the native habitat. when taking risks. El-Erian said.
“So the non-bank sector is still out of the game. And we have to be vigilant about financial stability risk because that could come back and hurt the economy,” he added.
Ines is a market reporter who covers stocks. Follow her on Twitter at @ines_ferre
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