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- Mohamed El-Erian raised doubts about Fed chair Jerome Powell’s suggestion that the worst of the banking turmoil is over.
- PacWest is the latest bank to be hit by uncertainty, with its shares tumbling more than 50% in after-hours trading Wednesday.
- El-Erian said Powell’s remarks may get added to a list of Fed communications that ended up eroding its credibility.
Mohamed El-Erian has raised doubts about Federal Reserve chair Jerome Powell’s suggestion that the worst of the banking turmoil is over, saying it may belong to a list of statements that ended up eroding the institution’s credibility.
The top economist made the remarks after PacWest Bancorp’s shares plunged more than 50% in after-hours trading Wednesday on news it was exploring strategic options including a sale. It is the latest regional bank to be hit by the turmoil that started with Silicon Valley Bank’s collapse in March. Four lenders have folded up so far, with First Republic Bank shutting down earlier this week.
Following the Fed’s latest interest-rate increase on Wednesday, Powell told reporters that First Republic’s failure and its subsequent takeover by JPMorgan was “an important step toward drawing a line under that period of severe stress” that the banking sector has undergone since March. Three banks were at the center of the recent turmoil, he said, adding that “those have now been resolved.”
“I fear that this may end up being added to the list of unfortunate Federal Reserve communications over the last few years that have eroded the credibility of the Fed, undermined its policy guidance/effectiveness, and risked its political autonomy,” El-Erian said in a Thursday tweet.
The chief economic adviser at Allianz has previously broken down what he thought the Fed should talk about to curb volatility in the current economic environment that is marked by stubborn inflation, banking instability, and high interest rates.
In a recent Bloomberg opinion column, El-Erian said the US monetary authority should address turmoil in the banking sector, adding that the risk of “further bank failures [have] not been extinguished” and are “likely to undermine the extension of credit to the economy.”
It’s important the Fed notes that this doesn’t mean the banking system as a whole is facing an existential crisis, he added. It’s not the largest US banks that will take immediate hits – instead, these issues are concentrated in smaller and regional firms, he said in the op-ed.