El-Erian, chief economic advisor at Allianz, appeared on CBS’s “Face the Nation” to discuss what caused instability in the markets last week.
“The main source of this volatility is changing perceptions of the Federal Reserve,” El-Erian said. “We are in this amazing situation … where good news for economy is bad news for the markets.”
El-Erian said the markets are worried that the Fed will tip us into a recession by overreacting to strong economic news.
“There is a possibility that the Federal Reserve makes another mistake and that that bumpy journey actually changes the destination,” the economist said. “That’s why the markets are on edge.”
El-Erian said the fed has already made “two big mistakes” that he thinks will “go down in the history books.”
He said the agency’s first error was to mischaracterize inflation as “transitory,” meaning that it would be temporary. Its second blunder, he said, was that it did not act in a meaningful way after inflation remained persistent and high.
“As a result, we risk mistake number three, which is by not easing the foot off the accelerator last year, they are slamming on the breaks this year, which would tip us into recession,” El-Erian said.