Transcript: Mohamed El-Erian on "Face the Nation," December 12, 2021

The following is a transcript of an interview with Mohamed El-Erian, chief economic adviser at Allianz, that aired Sunday, December 12, 2021, on "Face the Nation."

MARGARET BRENNAN: We learned last week that inflation is rising at the fastest rate in nearly four decades. We go now to Mohamed El-Erian, Chief Economic Adviser for Allianz Financial Services Company. And he joins us this morning from Philadelphia. Good to have you here.

MOHAMED EL-ERIAN: Thanks for having me.

MARGARET BRENNAN: The White House says that this number we just got the 6.8% inflation figure is backward looking because gas prices are coming down right now. Do you think that we've actually passed peak inflation?

EL-ERIAN: So, it is a backward-looking number. I don't think we have peaked- we have passed peak inflation, and that's despite all the efforts that the White House is putting in to limit inflation. I think we're going to see inflation stay around that level for a while.

MARGARET BRENNAN: How long?

EL-ERIAN: A few months, you know, we've seen a very interesting transition. The original drive of inflation, supply disruptions, labor shortages. The drive is still there, but less powerful. But the driver has planted all these other seeds for other sorts of inflation. And that's not a problem because of what the White House is or is not doing. This is a problem because of what the Federal Reserve is failing to do.

MARGARET BRENNAN: Well, the Federal Reserve Chair Jay Powell, has said he will retire that word transitory. It sounds like you are saying that words should not be used at all, period.

EL-ERIAN: Yeah, I've been saying this for months. The-the characterization of inflation is transitory, is probably the worst inflation call in the history of the Federal Reserve. And it results in a high probability of a policy mistake. So, the Fed must quickly, starting this week regain control of the inflation narrative and regain its own credibility. Otherwise, it will become a driver of higher inflation expectations that feed onto themselves.

MARGARET BRENNAN: That's an incredible thing to say, not just about the Fed chair, but the Treasury Secretary is a former Fed Chair herself. Why do you think that they are both fundamentally wrong?

EL-ERIAN: Well, I think the numbers have proven that transitory inflation was a mischaracterization. The Fed never expected inflation to be at 6.8%, if you look at all the projections they made this year, they were way below this, so they fundamentally misanalysed the inflation. Now that's not a problem. If they catch up now, if they're honest about their mistake and take steps now, they can still regain control of it.

MARGARET BRENNAN: So, the Fed has a meeting this coming week. As you know, they've been undertaking these emergency programs because of the pandemic buying something like a 100 billion in bonds each month. Are you saying they need to hit the brakes hard right now in order to get control?

EL-ERIAN: No, I'm saying that in order to avoid hitting the brakes hard, because if you've hit the brake hard in a few months, there's a risk you send this economy into recession, and it would be unnecessary harm to livelihoods. What they need to do now, MARGARET, is ease their foot off the accelerator. There is no reason why they should be injecting so much liquidity. There is no reason why they should be boosting the housing market at a time when house prices are pricing Americans out of buying homes. They should ease their foot off the accelerator in order to avoid slamming on the brakes later on.

MARGARET BRENNAN: And raising rates, when do we talk about that?

EL-ERIAN: Oh, we should be starting to talk about that now. There is the possibility that they may have to raise rates. Look, it's important to stop inflation being embedded into the system because two things happen when inflation gets embedded. One, you lose purchasing power, and the poor suffer the most. Second, you get a fed overreaction and then you get a recession and then you get income losses. So, you really want to navigate this process in a timely and orderly way.

MARGARET BRENNAN: So, if I look at what's happening around the country right now, we've talked about devastation that just happened in the midsection of this country due to these incredible tornadoes. Then I look at the Northeast and I see COVID spiking and all the uncertainty it brings with that. How much are these crises going to impact the growth that the White House tells us again and again is very promising and ultimately showing a healthy economy?

EL-ERIAN: It's certainly a risk, but it's not the baseline, the underlying strength of the economy is undeniable. You see this in the labor market, you see this in what companies are doing. So, the underlying strength of this economy is absolutely undeniable. But you want to be careful that you don't create more headwinds through policy mistakes. So, we can deal with these really unfortunate shocks. We still have enough momentum, but we don't have enough momentum to overcome a policy mistake.

MARGARET BRENNAN: When you listen to the business community, which has been warning about inflation for some time, you also hear people say this nightmare scenario of 1970s era inflation. Are people overreacting when they make that comparison? Or is it fair?

EL-ERIAN: So, I'm going to give you a mix of it. They are not overreacting in terms of the dynamics, which is a supply shock. This time it was supply disruptions and labor shortages. In the 70s, it was the oil shock causing other drivers of inflation. But they are overreacting when they say we're going to get to double digit inflation, we're not going to get to double digit inflation. We risk staying high- high inflation in the five to six levels, and that's much higher for what the economy and the financial markets are priced for. So, we've got to be really careful.

MARGARET BRENNAN: When it comes to fiscal policy and what the president is doing. You're saying inflation is global, so it's not all on President Biden's shoulders, but you have at least one prominent Democratic senator saying we can't go ahead with more congressional spending bills right now because inflation is a risk. It- should we be worried about that?

EL-ERIAN: No, on the contrary, what is on the table in terms of fiscal fundamentally addresses the two problems we have. One is labor force participation. If we look at what is in the bill that encourages more people to participate in the labor force and that addresses labor shortages and productivity over the longer term. And the second one is climate. So no, we should not step back from that bill, we should go forward because actually, that bill is part of the solution. It's not part of the problem.

MARGARET BRENNAN: All right. Thank you so much for your analysis and we will all be watching that Fed meeting later this week. We will be right back.