Transcript: Mohamed El-Erian on "Face the Nation, Oct. 9, 2022

The following is a transcript of an interview with Mohamed El-Erian, Allianz Chief Economic Adviser, that aired on Sunday, Oct. 9, 2022.

MAJOR GARRETT: We turn now to America's economic challenges and to help us out I want to bring in Mohamed El-Erian. He is the chief economic adviser at financial services company Allianz. He is also president of Queens College in Cambridge. He's good enough to join us this morning from New York. So this week was a very volatile week in the U.S. stock markets. Volatility has been ever present, I would say, during this calendar year. But this week seemed really volatile. Audience- for our audience, break it down. What's going on? What is the source, if you can identify it, of that volatility?

MOHAMED EL-ERIAN: So the main source of this volatility is changing perceptions of the Federal Reserve. We are in this incredible situation, Major, where good news for the economy is bad news for the markets. And that's because the markets are worried that the Federal Reserve will tip us into recession by overreacting to strong economic news.

MAJOR GARRETT: Every White House I have ever covered, and it's been more than one or two, has said, you know, the market isn't the economy. The economy is the economy. And what markets do, markets are going to do. Even so, volatility affects people's retirement, their planning and their sense of their medium and long term futures. How should people be looking at that and when they hear the president, as he did on Friday, talk about navigating this transition, what does that mean?

MOHAMED EL-ERIAN: So first as volatility and as unsettling volatility and volatility, when things go up and down and on the whole, you're better off over time. But that's not what we've had this year. We've had unsettling volatility because we've had the stock market down by anything from 20 to 30%. We've had bonds which are supposed to safeguard your investment also down by about 15%. So there's been nowhere to hide. That's why people feel insecure. That's why they look at their retirement plans with concern. The president is right. We are currently on what I think of as a bumpy journey to a better destination, and we need to navigate both the journey and get ready for the destination. There is a possibility that the Federal Reserve makes another mistake and that that bumpy journey actually changes the destination. That's why the markets are on edge.

MAJOR GARRETT: Is it your perspective that the Federal Reserve has already made a series of mistakes, either not acting fast enough or overreacting?

MOHAMED EL-ERIAN: So it's made two big mistakes that I think are going to go down in the history books. One is mischaracterizing inflation as transitory. By that, they meant it is temporary, it's reversible, don't worry about it. That was mistake number one. And then mistake number two, when they finally recognized that inflation was persistent and high. They didn't act. They didn't act in a meaningful way. And as a result, we risk mistake number three, which is by not easing the foot of the accelerator last year, they are slamming on the brakes this year, which would tip us into recession. So, yes, unfortunately, this will go down as a big policy error by the Federal Reserve.

MAJOR GARRETT: Continuing your metaphor for slamming on the brakes, does that mean it is impossible to achieve the either literal or mythical soft landing?

MOHAMED E-ERIAN: Even Chair Powell has gone from looking for a soft landing to soft landing to now talking about pain. And that is the- the problem. That is the cost of a Federal Reserve being late. Not only does it have to overcome inflation, but it has to restore its credibility. So, yes, I fear that we risk a very high probability of a damaging recession that was totally avoidable.

MAJOR GARRETT: Washington, D.C. is a hyper political town. Not a news bulletin. So it tends to absorb information internationally, sometimes in personal ways. So there's a lot of chatter this week that when OPEC+ decided and announced, it was cutting production. But that was against President Biden specifically. Do you agree with that or do you think it's a broader OPEC plus declaration about the direction of the global economy?

MOHAMED EL-ERIAN: So first, it does hurt the U.S. and we've seen oil prices go up above $90 a barrel. What does that mean? It means that inflation, which has been coming down now risks going up again so that- that is not good for us. However, that it came as a surprise. It didn't come as a surprise to me. OPEC is looking to protect oil prices in the context of declining global demand. All three major areas in the world China, Europe and the US, are slowing much faster, which means less demand for oil. So what does OPEC's do? They cut back supply. So this shouldn't have come as a big surprise. That's what they do. That's the history. But it's certainly not good news for the U.S. economy.

MAJOR GARRETT: Tying these things together, do you think higher gasoline prices inevitably mean higher inflation, making all the things we've discussed more complicated? And do you have a consumer price index prediction for the near future?

MOHAMED EL-ERIAN: So the next measure comes out in a few days. That's going to be for September. Headline inflation will probably come down to about 8%. But core inflation, what measures the drivers of inflation and how broad they are is still going up. So we still have an inflation issue. Inflation will come down. Major, The question is, does it come down with a slowdown in the economy or a major recession? That is the question that's being debated right now. It's not whether we'll have inflation coming down. We will, but it's the cost of that inflation coming down.

MAJOR GARRETT: Is the jobs report this week a silver lining in all of this otherwise gloomy assessment?

MOHAMED EL-ERIAN: It certainly is. We created 260- 263,000 jobs. That's a lot for this stage. We also reduced the unemployment rate to 3.5%. That's really low. That was one. One concern, which is that labor force participation, how many people are in the labor force came down. And that's not good news. And it talks to the importance of focusing on human capital.

MAJOR GARRETT: One last thing before I let you go. We have about 30 seconds. About two or three months ago, it was common for people on the Web to see stagflation headlines. We are not in a stagflation situation.

MOHAMED EL-ERIAN: We are. Growth is coming down. Inflation is still high. Unfortunately, it's not time to eliminate that term yet.

MAJOR GARRETT: Very good. Mohamed El-Erian, we thank you so much for your time. And we will be right back.