‘Substantial risk’ that Fed is about to make mistake, Pimco advisor

Andrew Harrer | Bloomberg | Getty Images

Janet Yellen, chair of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., U.S., on Wednesday, June 14, 2017.

Fels joins a growing crowd that believes the Fed, with inflation tracking only around 1.5 percent, is needlessly risking a recession by tightening policy. Supporters of the hikes see them as getting the Fed back to normal after years of ultra-easy policy that saw the central bank cut its benchmark target rate to near zero and explode its balance sheet to $4.5 trillion in economic stimulus.

Most recently, prominent economists with a group called “Fed Up,” including former Minneapolis Fed President Narayana Kocherlakota, publicly criticized the Fed and said it should raise its inflation target from the current 2 percent level.

Similarly, Fels sees central bank officials being too vigilant against an inflation problem that doesn’t currently exist.

“While the economic expansion continues, below-target inflation is not a major problem,” he said. “However — and this is the catch — when the next downturn hits, there won’t be much of an inflation safety margin against deflation.”

The current low inflation rate at a time when the economy is near or ahead of full employment means “we are only one major adverse shock away from a serious deflationary scare,” Fels added.

“That’s why there is substantial risk that the Fed’s opportunistic tightening campaign is a hawkish mistake,” he said.

Watch: Economist David Rosenberg says the markets have yet to feel the impact of the Fed’s rate hikes.