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(Kitco News) Mohamed El-Erian, chief economic adviser at Allianz, is once again warning investors that the Federal Reserve made its biggest policy mistake in decades.
"As first mentioned almost a year ago, I fear that this may well end up being the biggest #Fed policy mistake in several decades," El-Erian tweeted on Monday.
This time, El-Erian cited inadequate bank stress tests that failed to accurately measure how banks would deal with higher interest rates following the Fed's most aggressive policy tightening cycle in decades.
The top economist has repeatedly questioned the Fed's decisions in the past year, saying that the U.S. central bank was too late to react to quickly rising inflation. And after missing out on the right time to start raising rates, the Fed initiated a forceful monetary policy tightening, which has increased the likelihood of economic downturn and financial instability.
El-Erian is now commenting on a series of bank failures in the U.S. last month, with the March collapse of Silicon Valley Bank being the most significant banking failure since 2008.
He pointed to commentary from the Peterson Institute for International Economics (PIIE) that highlights inadequate bank stress tests reinforcing "the view of an ongoing series of policy errors by the Federal Reserve."
The PIIE released a report last week stating that the Fed's recent bank stress tests used "scenarios with little variation" and that "none examined higher interest rates."
This comes after the Fed's February publication of macroeconomic scenarios to assess the stress test for major banks in 2023.
"For reasons that need not detain us here, banks of SVB's size were not included in these stress tests. But the question remains: Just how appropriate is the choice of macroeconomic scenarios?" the PIIE report said. "Every severely adverse scenario used by the Fed since 2015 has the 3-month Treasury bill rate ending up at 0.1 percent. Many historic episodes of severe economic downturn have indeed been accompanied by low interest rates, as the Fed used its policy tools to support aggregate demand. But it is a bit strange that not since 2015 has a stress test involved rising interest rates."
El-Erian also cited recent comments by Julius Baer CEO Philipp Rickenbacher to the Financial Times. "Things will remain very complicated — everything that was there a month ago will not go away," Rickenbacher told the FT. "There's still some room for policy mistakes at the highest levels when it comes to interest rates . . . everyone's senses are sharpened right now."
The chief economic adviser at Allianz previously criticized the Fed for defining inflation as "transitory" in 2021 and then proceeding to tighten at the fastest pace in decades to bring its key policy rate from around zero to a range of 4.75%-5%.
Global growth has been another major concern for El-Erian, who, in another tweet, referred to "a sobering study from the World Bank."
In its recent report, the World Bank warned that average global economic growth will drop to a three-decade low of 2.2% per year through 2030, adding that this will lead to a "lost decade" for the world's economy.
