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Mohamed El-Erian Says the Federal Reserve Is Broken and Needs a Complete Overhaul

MarketDash Editorial Team
6 days ago
Top economist Mohamed El-Erian isn't mincing words: the Fed's credibility is on the line after years of policy mistakes and internal dysfunction. He's calling for major reforms that go far beyond the usual rate-cut debates.

If you're tired of hearing about whether the Federal Reserve will cut rates in December or who might become the next Fed Chair, Mohamed El-Erian has some news for you: you're asking the wrong questions.

The Real Problem Runs Much Deeper

El-Erian, the Chief Economist at Allianz, appeared on CNBC's "Squawk Box" on Monday and made it clear that the Fed's problems go way beyond the usual month-to-month policy debates. The current focus on short-term decisions, he argued, completely misses the broader structural crisis brewing inside the central bank.

"How will this Fed be reformed?" El-Erian asked, before delivering a sharp critique: "This Fed went to sleep." He's pointing to a pattern of forecasting failures and operational breakdowns that have damaged the institution's credibility over recent years.

Even Fed Insiders Are Admitting Mistakes

What makes this moment particularly striking is that people inside the Fed are starting to say the quiet part out loud. El-Erian cited remarks from Cleveland Fed President Loretta Mester, calling them a rare moment of institutional self-awareness. She's acknowledged that "we made mistakes" and that serious improvements are needed.

Mester's prescription includes better forecasting methods, a pivot toward scenario-based analysis rather than point estimates, greater focus on supply-side dynamics, and a more robust internal compliance culture. In other words, the Fed needs to rethink how it thinks.

El-Erian pushed for a strategic overhaul of the Fed's approach. "We don't need a play-by-play Fed. We need the Fed to cool it," he said. He also pointed to the extreme swings in interest rate expectations as evidence that forward guidance has essentially broken down.

A Chorus of Criticism

El-Erian isn't alone in calling for major changes. Treasury Secretary Scott Bessent recently launched his own broadside against the central bank, accusing it of driving both inflation and inequality. "The Fed must change course," Bessent declared, arguing that recent policies have "enriched the rich at the expense of the poor" while also fueling the U.S. housing affordability crisis.

Economist Judy Shelton, who advised President Donald Trump during his first term, shares similar concerns. She argues that the Fed's challenges extend far beyond rate decisions to fundamental problems with how the institution operates. "We're really looking at much deeper problems at the Federal Reserve, its models, its constructs, the way the Federal Reserve staff choreographs the meeting," Shelton said.

When Markets Whipsaw This Hard, Something's Wrong

Want evidence that forward guidance isn't working? Look at the CME Group's FedWatch tool. The probability of a rate cut at next week's Federal Open Market Committee meeting now stands at 87.2%. Just two weeks ago, there was nearly a 70% probability of no cuts at all.

El-Erian has called this "wild volatility," noting that it's "the opposite of the 'predictability and stability' the Fed usually strives for." In a post on X last month, he blamed the chaos on multiple factors: the prolonged government shutdown, "a dual-mandate squeeze" as the Fed juggles rising inflation against a cooling labor market, and what he described as a "lame-duck Chair."

When the market can't figure out what the Fed will do two weeks in advance, that's not just noise. That's a credibility problem. And according to El-Erian and a growing chorus of critics, it's time for something more than band-aids.

Back to News

Mohamed El-Erian Says the Federal Reserve Is Broken and Needs a Complete Overhaul

MarketDash Editorial Team
6 days ago
Top economist Mohamed El-Erian isn't mincing words: the Fed's credibility is on the line after years of policy mistakes and internal dysfunction. He's calling for major reforms that go far beyond the usual rate-cut debates.

If you're tired of hearing about whether the Federal Reserve will cut rates in December or who might become the next Fed Chair, Mohamed El-Erian has some news for you: you're asking the wrong questions.

The Real Problem Runs Much Deeper

El-Erian, the Chief Economist at Allianz, appeared on CNBC's "Squawk Box" on Monday and made it clear that the Fed's problems go way beyond the usual month-to-month policy debates. The current focus on short-term decisions, he argued, completely misses the broader structural crisis brewing inside the central bank.

"How will this Fed be reformed?" El-Erian asked, before delivering a sharp critique: "This Fed went to sleep." He's pointing to a pattern of forecasting failures and operational breakdowns that have damaged the institution's credibility over recent years.

Even Fed Insiders Are Admitting Mistakes

What makes this moment particularly striking is that people inside the Fed are starting to say the quiet part out loud. El-Erian cited remarks from Cleveland Fed President Loretta Mester, calling them a rare moment of institutional self-awareness. She's acknowledged that "we made mistakes" and that serious improvements are needed.

Mester's prescription includes better forecasting methods, a pivot toward scenario-based analysis rather than point estimates, greater focus on supply-side dynamics, and a more robust internal compliance culture. In other words, the Fed needs to rethink how it thinks.

El-Erian pushed for a strategic overhaul of the Fed's approach. "We don't need a play-by-play Fed. We need the Fed to cool it," he said. He also pointed to the extreme swings in interest rate expectations as evidence that forward guidance has essentially broken down.

A Chorus of Criticism

El-Erian isn't alone in calling for major changes. Treasury Secretary Scott Bessent recently launched his own broadside against the central bank, accusing it of driving both inflation and inequality. "The Fed must change course," Bessent declared, arguing that recent policies have "enriched the rich at the expense of the poor" while also fueling the U.S. housing affordability crisis.

Economist Judy Shelton, who advised President Donald Trump during his first term, shares similar concerns. She argues that the Fed's challenges extend far beyond rate decisions to fundamental problems with how the institution operates. "We're really looking at much deeper problems at the Federal Reserve, its models, its constructs, the way the Federal Reserve staff choreographs the meeting," Shelton said.

When Markets Whipsaw This Hard, Something's Wrong

Want evidence that forward guidance isn't working? Look at the CME Group's FedWatch tool. The probability of a rate cut at next week's Federal Open Market Committee meeting now stands at 87.2%. Just two weeks ago, there was nearly a 70% probability of no cuts at all.

El-Erian has called this "wild volatility," noting that it's "the opposite of the 'predictability and stability' the Fed usually strives for." In a post on X last month, he blamed the chaos on multiple factors: the prolonged government shutdown, "a dual-mandate squeeze" as the Fed juggles rising inflation against a cooling labor market, and what he described as a "lame-duck Chair."

When the market can't figure out what the Fed will do two weeks in advance, that's not just noise. That's a credibility problem. And according to El-Erian and a growing chorus of critics, it's time for something more than band-aids.