Economist Predicts the Fed’s Response to Inflation Will Push Crypto Higher

Allianz Chief Economic Advisor Mohamed El-Erian says the Federal Reserve’s response to inflation will cause prices of cryptocurrencies like bitcoin to “go higher.” He noted, “This is what you get when you wait too long to figure out what inflation is and take action.”

Forecasts by Allianz’s chief economist

Economist Mohamed El-Erian discussed the U.S. economy, markets and the Federal Reserve’s response to inflation in an interview with CNBC on Monday.

El-Erian is president of Queens College, Cambridge University. He is also chief economic advisor to Allianz, the corporate parent company of PIMCO, one of the largest investment managers, where he was CEO and co-CEO.

He explained:

I think the markets have realized that we have three problems. The first is high, persistent inflation with us. The second is that the Fed is way behind, and the third is that the path for orderly disinflation is pretty narrow.

These factors, according to the economist, now raise questions for companies about growth. He noted that investment bank Goldman Sachs said Monday that there is a 35 percent chance of a recession in the next two years. “That’s a significant number – 35%,” El-Erian stressed.

“So, the big question is whether we can navigate this landscape of inflationary growth, which has become much more complex,” he said, adding that “bank executives, they’re concerned about the macro environment.”

Value recovery

Allianz’s chief economic advisor was asked about the long-term prospects for the cryptocurrency market after major cryptocurrencies, including bitcoin, collapsed over the weekend.

“I think the concern for cryptocurrencies is that this drop is happening at a time when gold is rising and has reached almost $2,000,” he opined. “Because the main argument for cryptocurrencies is diversification. In times of inflation, it’s attractive. And lately, cryptocurrencies don’t play that role.”

The economist explained, “There’s a reason for that, and it’s because cryptocurrency, unlike gold, has benefited tremendously from all the infusions of liquidity. So there is a tug-of-war in cryptocurrency between recognizing that liquidity is leaving the system as a whole, and attractiveness as a diversifier. So far, the liquidity element is winning.”

He went on to detail:

What you’re seeing around the world is value recovery, and that’s a good thing. You see it in stocks, you see it in bonds, you see it in cryptocurrencies.

“We’re just adjusting to a paradigm where liquidity is no longer abundant and predictable,” he added.

El-Erian reiterated, “So I see this as part of the value recovery that we’re seeing in quite a few assets, not all of them yet, but quite a few already.”

The Fed’s inflation target and the cryptocurrency market

El-Erian was also asked about what might cause the Federal Reserve to change its inflation target and what that target would be.

“What would make them change the target is the realization that if they were late, they would not be able to achieve their goal and their credibility would be at risk,” he replied. “They will also fear that by hitting the brakes too hard, they could plunge the economy not only into a short-term recession but also into a longer-term one.” He continued: “They’re going to have a lot of temptation, and a lot of people are going to be pushing them to raise the target from 2% to 3% as an exit. It’s not going to be an easy exit, and it’s going to be incredibly controversial.”

El-Erian thinks, “This is what you get when you wait too long to figure out what inflation is and take action. We should have started QT last year, but we didn’t. And now we’re seeing the consequences of the Fed being too late.”

The economist was asked what would happen to cryptocurrencies and gold if the Fed did what he described. He replied:

They would both go up in price.

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