El-Erian: Fed has 'wrong inflation target,' should be less data dependent

The dependence on economic data that has been a guiding light of Jerome Powell's tenure at the Federal Reserve is also one of its great weaknesses, said Mohamed El-Erian in a new interview with Yahoo Finance's Julie Hyman on Thursday.

In critical remarks of the US central bank, the president of Queens' College, Cambridge, and chief economic adviser at Allianz, said that Powell's emphasis on backward-looking data, which operates with a lag, has denied the economy and market observers the clarity and vision that were present under previous eras of the Fed.

El-Erian pointed to the sharp rise in Treasury yields as a cause for concern.

In addition to the higher borrowing costs for both households and businesses and the drag on the economy, he emphasized the abrupt climb of yields. "There's fear, and I hope it's just a fear, that this could break something."

Treasury yields have continued their march higher, with the 10-year Treasury reaching 4.9% for the first time since 2007 in a move that has dragged the stock market lower. As investors sell bonds, prices fall and yields rise. And as this year's sell-off in the bond market deepens, Yahoo Finance's Jared Blikre reports, there's increasing worry that an approach towards a big, round number like 5% for 10-year yields can serve as a psychological magnet for investors, lifting yields even higher.

For El-Erian, Fed policy is no longer an anchor. "It's too backward-looking," he said. "So this is really a hard time for the bond market. And we need stability. We desperately need stability."

Powell said Thursday that the Fed would proceed "carefully" with its next steps. El-Erian said he'd like the Fed chair to pull back from an approach that is "excessively data-dependent." Instead, he'd like Powell to recognize that "you cannot drive a car on a curvy road looking through the back-view mirror," he said.

El-Erian continued: "That's what data dependency does. When your Fed tools operate with lags, it becomes a problem at points of inflections."

Contrasting Powell's leadership style with former Fed chairs Janet Yellen (now the current treasury secretary), Ben Bernanke, and Alan Greenspan, El-Erian said "this is the first Fed that hasn't got a single strategic bone in it."

The Fed's inflation goal of 2%, which has proven to be an elusive figure for central bankers, also drew El-Erian's criticism. "We have the wrong inflation target," he said.

"Even if you abstract from all the problems, the deep hole that the Fed dug itself into, we have these genuine uncertainties about monetary policy going forward."

Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on Twitter @hshaban.

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