There’s a risk the economy can be stuck in a period of stagflation — sluggish growth and high inflation —on the heels of Silicon Valley Bank’s collapse, economist Mohamed El-Erian said Monday. The bank’s failure and the stress on the banking system that followed has led many in the market to predict that the Federal Reserve will pass rather than raise interest rates at its meeting next week. The central bank has been hiking rates for the past year in an effort to tame inflation. El-Erian, chief economic advisor at Allianz, said the Fed should continue on its path and increase rates by another 25 basis points. The central bank needs to make it clear it has a set of tools to deal both with inflation and financial stability and will not confuse the two, he added. “We have an inflation problem and the longer we allow it to get embedded into the system, the greater the cost to society,” El-Erian said on CNBC’s ” Squawk Box .” “We may end up in stagflation.” However, there are a number of economic scenarios that could occur, El-Erian said. When asked if what is happening now could instead be disinflationary on the economy, since regional banks will have to boost capital ratios , leading to more expensive capital for everyone, he said, “It’s certainly a possibility.” “I can give you another scenario that says that what we’ve just gone through can be stagflationary,” he added. Among those who expect the Fed to hold off on rate hikes , starting next week, is Goldman Sachs. In a note Sunday, the firm’s economist Jan Hatzius cited the “recent stress” in the financial sector. El-Erian believes it’s possible the Fed may, in fact, hold off, but said there are no more perfect policy reactions available for the central bank. He said it’s the Fed’s actions that lay the foundation for the current situation. “We are here basically because we had a prolonged period of overly loose monetary policy,” he said. “When you hit the brakes you risk both economic and financial accidents and we just lived through a financial accident.”
