Global economist Nouriel “Dr. Doom” Roubini warns that the US economy is facing a number of headwinds suggesting that a period of contraction is still on the horizon.
In a new Bloomberg Television interview, Roubini says that the Fed is likely to keep rates higher for the foreseeable future despite the optimism in the markets.
The economist highlights it is unlikely that the Fed will cut rates anytime soon as there are multiple factors preventing inflation from dropping down to the central bank’s 2% target.
“The markets are still thinking that inflation is going to drop towards 2%, and therefore the Fed is going to cut rates and cut them aggressively.
The Fed is pushing back… They’re saying we’re going to be essentially higher for longer. Not just the Fed, but other central banks that are structural forces. They implied it – inflation may be higher from deglobalization, to aging, to geopolitics, to other negative supply shocks. And therefore, I think the markets are still a little bit too optimistic that the Fed is going to aggressively cut rates starting early next year.
That is not going to be the case.”
Roubini also says that an economic downturn is still looming for the United States as the Federal Reserve keeps interest rates high. According to Roubini, the tight financial conditions along with higher oil prices might trigger a period of economic slowdown.
“The good news is it doesn’t look like we’re going to have a real hard landing. Then the question is whether we’re going to have a soft landing or a bumpy landing – bumpy landing being a short and shallow recession.
And on that debate, we don’t know yet. There are longer and variable lags in monetary policy. The Fed might have to hike more. The credit issues might emerge as there is a tightening of financial conditions. Oil prices higher imply on one side higher inflation and lower economic activity even in the United States.
So I would say that whether we’re going to have a true soft landing rather than a short and shallow recession is still an open question even for the United States.”
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