Mohamed El-Erian addressed the key concerns investors are grappling with today, in an Insider interview.
He flagged recession risks, covered credit-crunch concerns, and bemoaned the Fed's tight monetary policy.
The top economist also sounded the alarm on commercial real-estate risks in a world of high interest rates.
A credit squeeze is threatening the US economy, high interest rates have heightened the risk of "financial accidents", and the commercial real-estate sector is facing its "moment of truth," Mohamed El-Erian told Insider in an exclusive interview.
The chief economic adviser at insurance-to-asset management giant Allianz addressed the current key concerns of investors - seemingly fueled by the Federal Reserve's steepest interest-rate increases since the 1980s. The central bank has boosted benchmark rates toward 5% from almost zero just over a year ago, to curb decades-high inflation that policymakers had initially dismissed as "transitory".
"Having started late in addressing inflation, the Fed has been forced into a highly concentrated set of rate hikes that have not only enormously narrowed the path for a soft landing but have also increased the risk of both recession and financial accidents," El-Erian said on Wednesday.
The fallout from the banking turmoil
Kicking off the conversation, the top economist addressed turmoil in the US banking sector, triggered by the failures of Silicon Valley Bank and Signature Bank, and what that means for the Fed's fight against inflation this year.
"By highlighting that the economy is navigating a trilemma, rather than the usual dilemma, the tremors confirm that the Fed faces a difficult policy challenge that has been made even more so by the series of its mistakes – of analysis, forecasting, actions, and communication," he said, adding that he suspects "inflation will prove stickier than many expect."
El-Erian has previously said that the annual rate of consumer-price increases will remain stubborn at around 4% to 5%. The inflation rate fell to 5% in March from a 40-year high of 9.1% reached last summer, as the effects of the US central bank's rate increases fed through the economy.
The credit conundrum
While the recent banking turmoil seems to have calmed somewhat, fears of a credit crunch resulting from the banking instability appear to have taken firm root, with Morgan Stanley saying the squeeze has already begun. But according to El-Erian, "crunch is too strong a word for what is happening in the banking system."
"Yes, some banks are, and will need to reduce their loan books due to the loss of deposit and capital pressures. As such, this increases the likelihood of an economic slowdown," he said.
"But this, on its own, is unlikely to be the generalized phenomenon that would automatically tip the economy into recession. For that, you would need additional mistakes from the Fed and/or exogenous shocks," the former PIMCO chief investment officer said.
Commercial real estate faces 'moment of truth'
On commercial real estate (CRE), El-Erian warned that the current environment of elevated interest rates could spell trouble for the beleaguered sector.
"This is part of a larger set of activities that, while they made sense when interest rates were rock bottom and liquidity was abundant, make a lot less sense today. The moment of truth will play out over several quarters as some $1 trillion of commercial real estate holdings needs to be refinanced," El-Erian explained.
The CRE industry is grappling with high vacancy rates and may come under increased stress in the coming years, Jonathan Liang, JPMorgan Asset's head of Asia ex-Japan investment specialists, said this week. The sector is navigating a "nearly perfect storm" of much higher interest rates, a credit slowdown, and about $1 trillion of debt maturing in the next 12 to 18 months, Goldman Sachs strategist Jeffrey Fine said on a recent podcast.
High borrowing costs and tighter standards for obtaining loans — part of the fallout from the recent banking turmoil — could raise hurdles for big property owners as they seek to refinance a pile of loans.
"Some holders will be able to refinance in an orderly fashion while some others will be able dispose of their assets and use the funds to recommit to the asset class at lower valuations. The worry is that many others will come under both liquidity and capital pressures," El-Erian said.
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