Aggressive rate hikes are 'off the table' as Russia's war on Ukraine means the Fed will have to tolerate higher inflation, Mohamed El-Erian says

Mohamed El-Erian, chief economic adviser of Allianz.

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• War in Ukraine means the Federal Reserve won't be able to hike interest rates as aggressively, said economist Mohamed El-Erian. 
• That also means the Fed will have to deal with historically high inflation, he told CNBC. 
• The odds are "pretty even" on whether the Fed slams on the brakes or chooses to deal with higher inflation down the road, he added.

Top economist Mohamed El-Erian said the Federal Reserve won't be able to tighten monetary policy as aggressively now that Russia has invaded Ukraine.

Many on Wall Street expected several Fed rate hikes in 2022, starting with an increase of 50 basis points next month. Earlier this week, JPMorgan even predicted nine interest rate hikes this year of 25 basis points each time. 

"This takes 50 basis points completely off the table," El-Erian told CNBC Thursday morning. "It takes the 8, 9 hikes a lot of people were talking about for this year off the table, and thankfully so... I didn't think the US economy could accommodate and live with such slamming of the brakes of monetary policy."

The geopolitical conflict in Eastern Europe has already rattled global equities and, given Russia's position as one of the largest producers of energy, crude oil has skyrocketed. Higher fuel prices will add more inflationary pressure, which the Fed seeks to tamp down as consumer prices have seen annual growth of more than 7%.

But fewer rate hikes means the Fed will be stuck in a "very unsatisfactory situation" when it comes to growth and inflation, El-Erian said.

"The Fed is going to have to be even more careful, and it's going to have to tolerate higher inflation," he warned. 

When asked whether reining in high inflation requires putting the economy into a recession, El-Erian said that has been the case historically as Fed policymakers are forced to tighten sharply.

But the geopolitical shock of the Russia-Ukraine war puts that playbook into question, he said, estimating that the odds are "pretty even" on whether the central bank slams on the brakes or instead chooses to deal with higher inflation down the road.

"This is the situation everyone was afraid of," he said. "That by being late, you have fewer policy options."

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