Famed economist says potential Fed inflation target of 3% would mean crypto going higher

Economist Mohamed El-Erian said recently that the Federal Reserve might be obliged to raise its inflation target from 2% to 3%, given the difficulty of bringing the current high levels down. He said that gold and crypto were likely to flourish in this kind of environment.

El-Erian was speaking to CNBC Squawk Box on Monday when he surmised that the Federal Reserve may well raise its inflation target to 3%, which would give it some breathing space as it sought to halt inflation and bring it back down.

He said:

"What will force them to change their target is the recognition that by being so late, they can't get to that target and their credibility is threatened. They will also worry that by hitting the brakes too hard, they may push this economy not just into a short-term recession but into a longer-term recession." 

Given that both gold and crypto are supposed to be hedges in a high  inflation scenario, El-Erian sees both assets going higher if the Fed should set its long-term inflation target to 3%. On the fact that this will be seen as quite controversial, El-Erian said:

“That’s what you get when you waited too long to recognise what inflation is, and to take action. We should have started QT (quantitative tightening) last year. We didn’t, and we are now see the consequences of the Fed being so late.”

On the fact that crypto appeared to be languishing as gold heading for $2000, El-Erian was quoted by Markets Insider as saying:

"The concern for the crypto people is that this decline is happening at a time when gold is up and hitting almost $2,000. The big argument for crypto is it's a diversifier — at a time of inflation, it is attractive." 

However, he explained that the vast amount of liquidity that had entered crypto during the Covid pandemic was now leaving, and that this was detracting from the attractiveness of crypto as a diversifier in times of high inflation.

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