El-Erian Says Fiscal Policy Must Help the Fed Tackle Economic Pressures

The Federal Reserve has one of the most powerful levers for steering the U.S. economy, but even the central bank cannot solve the country's economic challenges alone, Mohamed El-Erian said as inflation and bond yields remain elevated and government debt continues to draw attention, Hamza Shaban reported for Yahoo Finance.

Mohamed El-Erian says fiscal policy must play a larger role as the Federal Reserve confronts persistent inflation, elevated bond yields and rising government debt.

With some positive inflation news and signs of a cooling labor market, debate over the Fed's interest-rate policy has intensified.

Federal Reserve Chairman Kevin Warsh has emphasized the power of monetary policy, but El-Erian, chief economic adviser at Allianz, said there are limits to what the central bank can accomplish.

El-Erian argued that fiscal policy also needs to play a larger role.

He said monetary policy should not be expected to address problems that are primarily connected to government spending, deficits, energy disruptions and other issues outside the Fed's direct control.

Rate expectations had shifted sharply from the previous week, when an October rate increase appeared likely.

By Friday afternoon, markets were pricing in an almost 80% probability that the Fed would hold rates steady, according to the market measure cited by Yahoo Finance.

"Monetary policy should not be the only game in town," El-Erian said on Yahoo Finance's live morning show, The 8:30. "This is a role for fiscal policy."