El-Erian Says Inflation Will Remain Sticky: 'When We Get To 4%, That's Going To Be A Major Decision To Be Made By Society'

Zinger Key Points
  • The noted economist believes inflation is not going to come down in an overly fashion.
  • El-Erian doesn't see the possibility of forced sales of foreign assets by Japanese institutions after yield curve policy change.
  • The move in JGB yields is not large enough as of now to force such sales, he said.

Allianz chief economic adviser and noted economist Mohamed El-Erian believes inflation is going to remain sticky and that when it reaches 4%, there’s going to be a major decision to be made by the society on what the next steps would be.

“We are not going back to where we came from -- for many reasons. One is the unintended consequences of a ridiculous regime of very low interest rates and infinite QE. Inflation is not going to come down in an overly fashion. We are going to get sticky inflation. When we get to 4%, that's going to be a major decision to be made by society as to what to do next. So, we are not going to the old regime. We are exiting one regime and entering another regime -- of money being priced more appropriately,” El-Erian said on Bloomberg TV.

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Major Wall Street indices closed in the green on Tuesday, albeit just marginally higher, ending a four-day losing streak as investors and traders are watching out for a much anticipated year-end rally. Surprisingly, market participants decided to shrug off a surprise move by the Bank of Japan to widen its yield cap on its long-term bonds – a move that sent bond yields soaring across the world. The SPDR S&P 500 ETF Trust SPY closed 0.14% higher while the Vanguard Total Bond Market Index Fund ETF BND shed 0.66%.

On Japan: El-Erian noted that he does not see the possibility of forced sales of foreign assets by Japanese institutions following the government’s surprise move.

“To those wondering about the very muted reaction of US #markets to the Bank of Japan news:

The main contagion risk here is the possible forced sale of credit and other foreign assets by Japanese institutions. The move in JGB yields is not large enough as of now to force such sales,” he said in his tweet.

“Think of the BoJ’s increasing JGB purchases as seeking to minimize the risk of markets testing the new 50bps ceiling at the risk of aggravating the structural stress on the functioning of the government bond market. Lots of research papers will be written on this policy experiment,” he added.

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Photo by IMF on Flickr

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Posted In: Analyst ColorNewsEconomicsFederal ReserveMarketsAnalyst RatingsBank of JapanInflationMohamed El-Erian
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