The US economy is facing the ultimate 'trilemma' as the Fed desperately tries to get inflation down, Mohamed El-Erian says

• Top economist Mohamed El-Erian said the US central bank is facing three major obstacles at once.
• Policymakers are navigating a "trilemma [of] price stability, maximum jobs, and also financial stability," he told Bloomberg TV.

The Federal Reserve is facing three major obstacles, and recent banking turmoil is making its job of tackling them more difficult, Mohamed El-Erian said.

"This just makes the Feds' ability to navigate this trilemma [of] price stability, maximum jobs, and also financial stability that much harder," he told Bloomberg Television Thursday.

Turmoil in the banking sector snarled financial markets after the failure of Silicon Valley Bank in March. Overseas, Credit Suisse was bought up by UBS on concerns over the Swiss lender's long-term health.

But El-Erian, who is the chief economic adviser at Allianz, said the banking sector is not suffering from a crisis but is instead seeing "tremors," adding that what many have referred to as a credit crunch is more like a contraction.

A credit crunch is economy-wide, while a contraction has more uneven distribution, with small businesses getting hit harder than big businesses, he added.

The credit contraction will have a similar effect on the economy that Fed rate hikes do, equivalent to about 25 to 50 basis points, El-Erian estimated.

The central bank has been on a monetary tightening campaign for over a year, raising borrowing costs by 475 basis points to combat decades-high inflation.

Next month, markets widely expect the Fed to lift rates by another 25 basis points, then pause on further hikes with odds growing for a pivot to rate cuts later in the year, according to CME's FedWatch Tool.