Famed Turkish-American consultant and economist Nouriel Roubini, also known as 'Mr Doom' warned investors about how the Federal Reserve faces tough choices to bring parity in a faltering US economy, in a recent conversation with Bloomberg TV.
He discussed how bringing price stability, growth stability and avoiding a hard landing with just one policy tool i.e., the fed funds rates is nearly impossible.
“Well inflation is still well above target; core consumer price index (CPI) was at 5.6 percent. It is falling but not fast enough. The federal reserve has revised upward prediction on personal consumption expenditure index from 3.2 to 3.5 by the end of the year. They want to in principle hike in May and then stop but if inflation were to become more persistent then that option is not going to be available.”
On the issue of the future course of interest rate trajectory in the US he stated, “Then the federal reserve is going to be in a very serious dilemma or in actually trilemma. They want to achieve price stability, growth stability and avoid a hard-landing and financial stability. If personal consumption expenditure index remains near 4 percent rather than 3 percent by the end of the year, then you will be in trouble because then you will have to raise rates well above 5.25 percent. If you don’t do that inflation expectations will get re-anchored.”
“Still if you raise rates above that and the markets are pricing in cutting rates, so there will be a surprise and then you could have, one hard landing of the economy and secondly more financial instability for the banks and for overall long rates as well.”
“So, achieving price stability, growth stability and financial stability with one policy tool, that is the fed funds rates to me looks like mission impossible. So, either hard landing and a financial crash or the re-anchoring of inflation expectations.”
Whereas on the ongoing banking turmoil and credit crunch in the US economy he stated that, “right now there is a credit crunch, the regional banks will have to contract credits and the regulators are going to tighten, also their supervision and regulation of banks especially the regional banks will be focused upon, and the current credit crunch is equivalent to at-least 50 basis points. The US economy has slowed down already in the first quarter to 1 percent.”
“So, if you go from even 1 percent to something like 50 basis points less you are close to zero. It’s a growth recession and if that happens the amount of distress in financial markets will become more severe. We will start to see rising defaults in households on their auto loans, on their credit cards, on some of the mortgages. This will further result in rising default rates among highly leveraged parts of the business sector and once the credit crunch becomes more severe it will make a hard landing of the real economy more likely.”
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