“Now economic growth faces greater challenges,” El-Erian wrote, arguing that Omicron headlines could revive fears of stagflation, a combination of rising inflation and slowing economic growth.
El-Erian wrote in the op-ed that there’s considerable uncertainty around how the risk of stagflation would play out in the coming months, with the economist noting that private sector drivers of the economy are “still solid enough on a stand-alone basis to power through another COVID disruption” but growth prospects face potentially stronger headwinds due to the growing risk of policy missteps or tighter financial conditions in markets.
Markets reacted swiftly to Omicron headlines last week, with risk assets such as stocks and cryptocurrencies, as well as crude oil, seeing broad selloffs on Black Friday as investors pivoted to safe havens such as U.S. Treasurys.
Speaking to Fox, El-Erian said markets are concerned that, rather than easing loose monetary conditions gradually, the Federal Reserve might wait in the short-term and hit the brakes hard later to dampen elevated price pressures and inadvertently spark a recession.
“We haven’t got a single historical experience in which the Fed has been late to the policy challenge and has not caused a recession,” El-Erian said. “So rather than hit the brakes hard next year, it’s much easier to ease your foot off the accelerator starting now.”
At its most recent policy meeting, Fed officials voted to start dialing back the central bank’s $120 billion in monthly asset purchases at a pace of $15 billion per month, although they left the door open to a faster schedule if conditions warrant. At the same time, they have ruled out any interest rate increases before the wind-down of the asset buys.
El-Erian also told Fox he expects a number of second-round inflationary effects, such as people demanding higher wages and corporations raising prices further to maintain margins, to keep price pressures high into next year.
The World Health Organization (WHO) named the Omicron strain, which was discovered in South Africa less than a week ago, as a “variant of concern” on Nov. 26, sparking travel bans to several African nations.
On Nov. 29, the WHO posted a technical brief on the variant, saying it is likely to spread internationally, posing a “very high” global risk of infection surges that could have “severe consequences” in some areas.
The agency added that, while there have been no reported deaths linked to Omicron to date, more research is needed to assess the variant’s potential to escape protection against immunity induced by vaccines and previous infections.
