Congress needs to hold the Fed more accountable as the central bank chases an outdated inflation target, says Mohamed El-Erian

• Congress needs to hold the Federal Reserve accountable as the central bank works to meet an outdated inflation target, Mohamed El-Erian wrote in the FT.
• Upside inflation surprises have prompted investors to reprice assets, leading stocks to drop and yields to fly higher.

US lawmakers need to step up in holding the Federal Reserve accountable for its policy structure and help the central bank tamp down on sticky inflation, said top economist Mohamed El-Erian.

In a Financial Times column published Monday, he said there's now growing recognition of stubbornness in price increases in the services sector and limits to goods disinflation.

"This better understanding of short-term inflation dynamics is necessary to avoid the Fed falling far behind for the third time in two years," he said.

"It is not sufficient, however. It needs to be accompanied by a stronger policy architecture and a constructive evolution in the policy debate away from the Fed being 'the only game in town', chasing an increasingly elusive and outdated inflation target."

The Federal Open Market Committee has a 2% inflation target. The closely watched CPI annual inflation gauge was at 6.4% in January, outstripping expectations of 6.2%.

Such upside inflation surprises have spurred investors to reprice assets. Stocks have whittled down this year's gains while bond yields have surged on expectations that the Fed will keep interest rates elevated for longer than investors had anticipated.

The S&P 500 has lost roughly 2.5% so far in February, cutting its year-to-date advance to 3%. Meanwhile, the 2-year Treasury yield has shot above 4.7%, hitting the highest since July 2007 as well as the upper bound of the federal funds target range of 4.5%-4.75% set by monetary policy makers, according to Tradeweb.

El-Erian, chief economic adviser at Allianz and president of Queens' College in Cambridge, said the Fed's inflation target is too low and yet hard to revise "given that the world's most important central bank has already undermined its credibility."

"Congress needs to help: first, by enhancing Fed accountability and requiring it to update its policy framework, as well as follow the example of the Bank of England in structurally inserting outside views in its policy formulation process; and second, by formulating a more comprehensive approach to easing supply side constraints," he wrote.

For his part, Federal Reserve Chairman Jerome Powell has dismissed the idea of changing the 2% inflation target.

Meanwhile, the Fed is expected to raise interest rates again at its March 21-22 meeting. Talk in the markets is bubbling up about the possibility policymakers may raise rates by 50 basis points, ratcheting up from the prior increase of 25 basis points.