The prominent economist known as “Dr. Doom” warned this week that he sees the Federal Reserve’s scramble to tighten policy resulting either in a hard landing for the US economy or persistently high inflation.
Nouriel Roubini, the CEO of Roubini Macro Associates, said the Fed’s benchmark interest rate needs to rise much higher than its current range of 2.25% to 2.50% to successfully address a “severely inflationary environment” in the US.
“The fed funds rate should be going well above 4% — 4.5% to 5% in my view — to really push inflation towards 2%,” Roubini said during an appearance on Bloomberg on Monday. “If that doesn’t happen, inflation expectations are going to get unhinged.”
“Or if that happens, then we are going to have a hard landing,” Roubini added. “Either way, either you get a hard landing or you get inflation getting out of control.”
Inflation showed signs of improvement this month, with the July Consumer Price Index coming in lower than expected at 8.5%. The improved reading has prompted optimism among investors that the Fed could pursue a softer series of interest rate hikes while aiming to bring inflation back to its 2% target.
The Fed’s most recent projections from June indicate the central bank expects its benchmark rate to reach approximately 3.375% by the end of this year and nearly 3.8% by the end of next year — a path that, according to Roubini, would be insufficient to bring down inflation.
“Markets expecting a pivot and the Fed cutting rates next year to me sounds delusional,” he added.
Roubini acknowledged that inflation “may have peaked” in the US, though he cautioned that any escalation in the Russia-Ukraine war or further COVID-19 lockdowns in China complicate the picture.
While energy prices have moderated in the US, the price of food, shelter and other necessities remains at decades highs.
Roubini, 64, once served as an economist on President Bill Clinton’s Council of Economic Advisers.
He earned the moniker “Dr. Doom” for his pessimistic views on the economy, including an accurate prediction about a looming housing market crash ahead of the Great Recession.