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There is a risk that the economy could get stuck in a period of stagflation — sluggish growth and high inflation — in the wake of the collapse of the Silicon Valley bank, economist Mohamed El-Erian said on Monday. The bank failure and the ensuing strain on the banking system led many market participants to predict that the Federal Reserve would rather make a decision than raise interest rates at its meeting next week. The central bank raised interest rates last year to curb inflation. El-Erian, chief economic adviser to Allianz, said the Fed should continue on its path and raise rates another 25 basis points. He added that the central bank should make it clear that it has a set of tools to deal with both inflation and financial stability and will not confuse them. “We have a problem with inflation, and the longer we let it take hold, the higher the cost to society,” El-Erian said on CNBC’s Squawk Box. “We could end up in stagflation.” However, there are a number of economic scenarios that could happen, El-Erian said. When asked if what is happening now could lead to a disinflation of the economy, as regional banks would have to raise capital ratios, which would make capital more expensive for everyone, he said: “It is certainly possible.” “I can offer you another scenario that suggests that what we just went through could be stagflation,” he added. Among those who expect the Fed to delay the rate hike from next week is Goldman Sachs. In a Sunday note, firm economist Jan Hatzius cited “recent stress” in the financial sector. El-Erian believes the Fed may actually hold off, but said the central bank has no better policy responses. He said that it is the actions of the Fed that lay the foundation for the current situation. “We are here mainly because we have had a long period of overly loose monetary policy,” he said. “When you hit the brakes, you risk both economic and financial crashes, and we just got through a financial crash.”
Credit: www.cnbc.com /
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