Despite establishing more consistent messaging, the U.S. Federal Reserve needs to do two more things to re-establish its credibility, according to Mohamed El-Erian, chief economic advisor to Allianz. “The more Fed officials repeat it, the more the market is pricing it in, but it’s mainly the fixed income markets so far that have priced it in,” El-Erian told CNBC’s Steve Sedgwick at the Ambrosetti Forum on Friday. “Other markets are hoping somehow that we are in a cyclical moment, not in what I think is more secular and strategic.”

El-Erian gave the Fed credit for establishing a clear and consistent message but said it would need to do two more things to provide its forward guidance credibility from here on out. “One is to explain to the marketplace why it got its analysis so wrong and what has it done about its forecasting abilities,” he said. “And secondly, change its framework. Remember, we still have a framework that is for a world of deficient aggregate demand and we’re in a world of deficient aggregate supply.” El-Erian added that the current framework had been geared toward an environment in which inflation has been “too low for too long” and where it is expected to remain low for a long period of time. He suggested that the central bank needs a new framework entirely. “That was the world before the pandemic. This framework was introduced in 2021, but unfortunately it’s backward-looking, so we do need a new framework, and I don’t think people quite realize how important the governing framework is,” he said. “That’s why, when I look at the Fed, I say they’ve done great on one thing but there’s two more things they need to do if their forward policy guidance is to stick.” Until inflation began soaring to 40-year highs, El-Erian said the market had “held the Fed hostage for a long time,” deducing what it wanted from policymakers’ mixed messaging on the pace and scale of monetary policy tightening.