2 reasons 'risk of recession is getting higher and higher': Mohamed El-Erian

The risk of a recession “is getting higher and higher,” says veteran economist Mohamed El-Erian.

“My definition of a recession is a holistic definition. It goes beyond two-quarters of negative GDP,” said Allianz’s chief economic adviser and former PIMCO CEO.

“The labor market is too strong. Consumer spending is too high. Business balance sheets are too strong. We’re just not in a recession. Is the risk of a recession high? Yes, it’s high and getting higher,” El-Erian said on Yahoo Finance’s “Influencers with Andy Serwer.”

He emphasized that the Federal Reserve is tightening monetary policy in a slowing economy. The International Monetary Fund’s recent forecast shows all major areas of the global economy slowing, calling conditions “gloomy and uncertain.”

El-Erian said that to stop the US from falling into recession, there are four specific measures that must be taken.

“First and foremost, we have to tame the inflationary beast,” El-Erian said.

“This is a Fed that needs to act not only to tighten monetary policy, but also to restore confidence.” Her future guidance right now is almost meaningless,” he said.

In July, the Federal Reserve announced a 75 basis point interest rate hike. Fed Chairman Jerome Powell said the central bank would be “data dependent” on its next steps — essentially forgoing forward guidance. Markets gathered from Powell’s unsigned comments.

El-Erian also said the government should “direct fiscal policy more towards protecting the most vulnerable segments of our society. This has huge economic, social and political implications.

He also suggested “reforms for growth and productivity need to be made, including to increase labor force participation” to improve supply chains.

“Finally, let’s not forget financial stability. Let’s not forget how risk has not only shifted and migrated from banks to non-banks, but non-banks have been encouraged by years of zero interest rates and massive and predictable injections of liquidity to go far beyond their native habitat in risk-taking,” El said. – Erian.

“So the non-banking sector is still offside. And we need to monitor the risk to financial stability because it could come back and hurt the economy,” he added.

Ines is a market reporter covering stocks. Follow her on Twitter at @ines_ferre

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