Bonds

Mohamed El-Erian says the financial markets are starting to doubt whether the Federal Reserve can bring inflation down to its 2% target.

El-Erian, the chairman of Gramercy Funds and a Bloomberg Opinion columnist, told Bloomberg Television that inflation indicators are heading in the wrong direction, increasing worries among investors about how long it will take for tighter monetary policy to rein in consumer-price increases.

That was underscored early Friday, when an inflation gauge closely watched by the Fed — the personal consumption expenditures index — unexpectedly accelerated to a 5.4% annual rate in January.

“We’re seeing actual and survey indicators heading the wrong way,” El-Erian said. “So, I think the market and more importantly, people in the street, are starting to doubt whether the Fed can deliver the 2%.”

El-Erian’s comments came after the faster-than-expected inflation figures sent bond yields rising and strengthened speculation that the Fed will continue raising interest rates through the middle of the year. Those figures followed hotter-than-anticipated jobs and CPI reports this month.

“Had the Fed not mischaracterized inflation as transitory, had the Fed not waited till March of last year for the first rate hike, had the Fed not downshifted so quickly to 25, the pain would be less,” El-Erian said. “Unfortunately, if they were gonna get to 2%, they’re gonna inflict tremendous pain on this economy.”

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