El-Erian has been a well-known critic of the Federal Reserve since his days as a top executive at Pimco, where he and “bond king” Bill Gross were such expert Fed interpreters they came to manage around $2 trillion of assets under management.

Stagflation is the “worst thing” for the Federal Reserve, El-Erian told Bloomberg, because it puts the two objectives of the central bank’s famous dual mandate—to maintain price stability and maximum employment—in conflict.

As a result, the Fed “is going to have to make a very difficult choice.” The central bank can either continue raising rates to fight inflation at the risk of throwing the economy into a recession, or ignore rising consumer prices and hope that a growth slowdown will bring inflation back to target levels.

However, El-Erian broke with Wall Street’s consistent predictions of an impending recession, telling Bloomberg that a full-blown recession for the U.S. economy isn’t guaranteed. But stagflation, he said, is now “unavoidable,” and stock market investors have yet to price in the “significant slowdown in growth” to come. 

“We’ve seen growth coming down, and we’re seeing inflation remaining high,” El-Erian said. “The Fed is finally catching up to developments on the ground, but it still has some way to go.” 

“It needs a lot of luck at this point,” El-Erian added.

The economist went on to argue that the current stagflation predicament was preventable had the Fed raised interest rates while the economy was still recovering from the pandemic instead of being overly attached to its “transitory” characterization of inflation. Now the central bank is facing a nightmare situation as it attempts to raise interest rates into a growth slowdown. 

Even former Fed Chair Ben Bernanke admitted in a New York Times interview last week that the Federal Reserve’s delayed response to rising consumer prices “was a mistake” that would lead to a period of stagflation.

Fed Chair Jerome Powell famously insisted inflationary pressures would cool coming out of the pandemic, but over the past few months, his tone has changed dramatically. At the Wall Street Journal’s Future of Everything Festival on Tuesday, Powell said the Fed will continue raising interest rates until there is “clear and convincing” evidence that inflation is coming back down toward the target 2% level.

It’s a hawkish shift that put stocks under pressure once again on Wednesday after a multiday rally that started at the end of last week.

The good news is that the consumer may be strong enough to withstand a stagflationary environment due to “significant savings that were built up during the pandemic” amid fiscal stimulus, El-Erian said.

However, he noted that “there are very vulnerable segments of the population, and so far, we haven’t seen enough being done to protect them.”