The Fed will be making a big mistake if it skips a rate hike this week, top economist Mohamed El-Erian warns

Mohamed El-Erian has claimed that the Federal Reserve could be making an error in its policies. He suggested that not raising interest rates, which is one of three possible options for the central bank, may be the worst choice. The prediction from traders is that the borrowing rates will remain the same this Wednesday, but will increase in July.

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According to Mohamed El-Erian, investors should prepare for the Federal Reserve to possibly commit an error after the conclusion of their June conference on Wednesday.

A well-regarded economist cautioned that not implementing an increase in interest rates is possibly the most unfavorable option for the central bank out of the three choices they have. The economist conveyed this sentiment in a Financial Times editorial, which was released on Monday.

Many traders anticipate that the Federal Reserve will keep the current borrowing costs on Wednesday and then increase the rates by 25 basis points in July. This is according to the observation made on CME Group's Fedwatch tool.

This strategy, which has the support of prominent policymakers like Christopher Waller, proposes that the central bank waits for six more weeks of economic data before making a decision on whether to continue its efforts to reduce inflation or stop them.

However, El-Erian, who was previously a co-CIO at PIMCO, strongly criticized the proposal to skip a meeting. He cautioned that the Federal Reserve is unlikely to gain any substantial insights into the effectiveness of its strategies to control the rapidly increasing prices from now until the next scheduled meeting, which will commence on July 25th.

He wrote that another month of data wouldn't really help the Fed figure out how well a policy tool works since it doesn't always work consistently and takes some time to see its effects.

El-Erian mentioned that the latest information supports an increase in interest rates by the central bank, which has consistently maintained that its decisions are based on data. He was probably referring to recent economic updates, such as the jobs report released in May, showing that the US job market is still very strong, despite the bank's efforts to reduce monetary supply.

According to El-Erian, the Fed should not avoid increasing interest rates and instead, they should implement one of two strategies. They could either increase the borrowing cost once more or express that they will temporarily halt their efforts to tighten while adopting a new target regarding inflation - specifically, maintaining it between 3% and 4%.

Explore further: David Rosenberg, a leading economist, is ridiculing the suggestions for the Federal Reserve to increase interest rates once more following a surge in job opportunities.