Solving the US economy’s financial issues with only Fed tightening looks like “Mission Impossible,” Nouriel Roubini said.
The Fed’s current approach will result in either a recession or entrenched inflation.
“So either a hard landing and a financial crash or de-anchoring of inflation expectations.”
The Federal Reserve has been tasked to settle the US economy’s precarious financial conditions, but the central bank’s current approach will likely result in either a recession or views for more entrenched inflation, Nouriel Roubini said.
The “Dr. Doom” economist said the Fed is up against the ultimate “trilemma” of trying to achieve price stability, growth stability, and financial stability using just one policy tool — tweaking the federal funds rate.
“To me, [this] looks like Mission Impossible,” Roubini told Bloomberg Television on Friday. “So either a hard landing and a financial crash or de-anchoring of inflation expectations.”
Inflation is slowing down but still well above the central bank’s target of 2%, which leaves the Fed in a difficult position as they decide their next policy move.
On Friday, the latest reading on the Fed’s preferred inflation gauge, the personal consumption expenditures index, showed prices were up 4.2% annually.
If the Fed continues to hike rates to bring inflation down further, that could hit the economy and banks harder. But if policymakers let inflation continue to run above target, that could reinforce inflation.
“They want to in principle to hike in May and then stop,” Roubini added. “But if inflation were to become more persistent, then that option is not going to be available.”
The Fed is expected to raise borrowing costs again on May 3, with the CME FedWatch Tool forecasting a 90% chance that policy makers will hike by another 25 basis points. This will be the 10th interest rate hike since March of 2022, and bring the benchmark rate to 5%-5.25%.
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Source: https://finance.yahoo.com/news/nouriel-roubini-says-hard-landing-224930725.html