Is the inflation beast not dead yet- The U.S. non-farm payrolls report in September is too strong. Il-Alan- Fed policy cannot only focus on employment

In a recent interview with Bloomberg TV, Allianz Group’s Chief Economic Advisor Mohamed El-Erian discussed the unexpectedly strong U.S. non-farm payroll report for September. He emphasized that this data serves as a crucial reminder for the Federal Reserve (Fed) that inflation remains a pressing issue, highlighting the importance of shifting the focus back to combating inflation alongside their employment goals. El-Erian estimates a 55% probability of a “soft landing” for the U.S. economy, while he assesses the chance of a recession at around 30%.

On October 4, the U.S. Department of Labor released figures showing that non-farm payrolls increased by 254,000 in September, the largest rise in six months and significantly above economists’ expectations. The unemployment rate fell from 4.2% to 4.1%, and the year-over-year growth in average hourly earnings rebounded to 4%. This positive news triggered a surge in the U.S. stock market, while bond prices fell sharply, causing yields to rise.

El-Erian remarked on the employment report, saying, “The labor market is not only resilient; these figures, at face value, demonstrate a robust labor market at the tail end of a business cycle.” He urged the Fed to look beyond a narrow focus on employment, stressing, “We need to stop saying the Fed should only worry about maximizing employment.” He reminded viewers of the Fed’s dual mandate: to stabilize prices and maximize employment.

Additionally, he noted that the recent employment report challenges the market’s overly optimistic expectations for Fed interest rate cuts, prompting a recalibration of market projections to align more closely with current realities. El-Erian evaluated the chances of a “soft landing” at 55%, a “harder soft landing” at 15%, and a 30% probability of recession.

Considering the current financial conditions, which he described as “extremely accommodative,” he predicts that U.S. inflation could stabilize in the range of 2.5% to 3%. He suggested that it might be more realistic for the Fed to revise its inflation target upward to this range instead of sticking with the 2% target.