Rick Wilking/Reuters
- Economist Nouriel Roubini has warned the Federal Reserve will have to trigger a recession.
- The US central bank has hiked interest rates from near zero to 4.5% to curb soaring inflation.
- Here’s “Dr Doom”, Sam Zell and other top experts on what damage that could do to the US economy.
Recession is coming, according to some of Wall Street’s loudest voices.
Prices are rising so fast that the Federal Reserve feels it has no choice but to crush economic growth, with the US central bank hiking interest rates from 0.25% to 4.5% this year.
While that tightening could help to tame surging prices, it also brings down economic growth by making borrowing more expensive, which weighs on spending.
But the central bank points to strong a strong labor report, which saw the US add 263,000 jobs in November, as evidence that it has scope to continue raising rates aggressively without causing too much economic damage.
Here’s what top stock market experts have said about a potential Fed-driven recession.
Nouriel Roubini, New York University economics professor known as “Dr Doom”:
It’s now looking inevitable that the Fed will have to trigger a recession if it wants to bring inflation down to its 2% target, Roubini said last month.
He pointed out that over the past 60 years, the US central bank has caused a recession any time inflation ran above 5%. The rate was 8.2% in September and even higher in the months before.
“The consensus has rapidly shifted, with even Fed Chair Jerome Powell recognizing that a recession is possible, that a soft landing will be ‘very challenging’, and that everyone should prepare for some ‘pain’ ahead,” he wrote in a Project Syndicate op-ed.
“Over time, economic malaise will deepen, inequality will rise even further, and more white- and blue-collar workers will be left behind,” Roubini added.
Sam Zell, founder of Equity Group Investments:
Billionaire investor Zell praised the Fed’s decision to continue clamping down on inflation via rate hikes – but acknowledged it makes a severe economic downturn more likely.
“I think that the likelihood is that we have a recession,” he told CNBC’s ‘Squawk Box‘ in early November.
“Frankly, that’s what happens when you flood the world with money and everything is free. You leave excess and that ultimately leads to a recession,” Zell added, referring to the Fed inflating asset prices and fueling an “everything bubble” by sticking with low interest rates last year.
Kenneth Rogoff, Harvard professor and former IMF chief economist:
A severe recession now looms partly because the Fed can only stomp down on inflation by increasing interest rates by another 200 basis points to 6%, Rogoff said early last month.
“If they really wanted to get inflation down in the 2% to 3% range on a sustained basis, they might need a fed funds rate of 6% or higher,” he told Fox Business.
“I worry that not only are we going to get a mild recession,” Rogoff added. “I think the chances that we get a significant recession are really pretty high.”
“I think it’s a 2023 story. The interest rate hikes take a long time to really eat at the underlying economy. They hit the stocks really quickly.”
Desmond Lachman, senior fellow at the American Enterprise Institute:
“The Federal Reserve’s rate hikes are already causing considerable economic damage and financial market stress both at home and abroad,” Lachman wrote in a CNN op-ed published last month.
The South African economist said the central bank’s tightening is already causing significant stress in several sectors of the US economy, particularly housing.
“Among the more disturbing economic changes resulting from the Fed’s tightening has been the increased signs of a serious recession developing in the housing sector,” Lachman said. “Mortgage rates, which are closely linked to the Fed’s interest rate hikes, have topped 7% — more than double what they were a year ago.”
Seth Carpenter, Morgan Stanley chief economist:
The Fed’s potential pivot to more gradual rate hikes could cause to a less severe recession, according to Morgan Stanley’s Carpenter – but he also said a new approach could lead to the slowdown dragging on for three years.
“They said that they want to tighten policy, to be restrictive so that inflation gets back to target. But then they said ‘over time’ — and I think it’s fair to ask what does that mean,” he told CNBC’s ‘Halftime Report‘ in November.
“The last time they did their projections, ‘over time’ meant at least three years for inflation to get back to their target.”
“They’re serious about bringing inflation down, but I also think they’re trying to be clear that they’re not trying to crash things so that everything comes down next year,” he added.
“They want to squeeze things enough so that we get the slowdown, but then they’re willing to let that slowdown happen over a long period of time.”
This content was originally published here.
