According to the chief economic adviser of Allianz SE Mohamed El-Erian, the Fed's decision to characterize inflation as temporary was the worst decision in the history of the central bank. This will lead to the likelihood of political error.
El-Erian said the Fed will have to act quickly to respond to rising inflation as markets are still digesting Friday's US inflation data, which showed the highest pace in nearly 40 years, rising 6.8% in November.
According to Mohammed El-Erian, inflation has not peaked and is not a short-term problem. Over the past year, he has stated many times that the US Central Bank underestimates this problem.
Inflation data will be the determining factor of how aggressive the Federal Reserve System can behave on December 15.
However, El-Erian warned that if the reduction is not aggressive enough now, it could lead to a sharper tightening reaction in a few months, which could trigger a recession.
At the November meeting, Fed Chairman Jerome Powell announced that the central bank would begin scaling back its $120 billion-a-month asset purchases at a rate of $15 billion a month, citing substantial further progress made.
A few weeks later, Powell testified before the US Senate Banking Committee, saying that in the presence of such problematic inflation, a more aggressive reduction was needed. It sounded much more aggressive than before.
In addition to the new pace of decline, which is likely to be announced on Wednesday, markets are also closely watching other hawkish formulations, including the Fed's forecasts on dot charts and the update of economic forecasts.