Yahoo Finance Roubini warns on inflation, sees 'crash' if Fed moves on rates too soon
Surging inflation is creating a conundrum for the Federal Reserve, economist Nouriel Roubini cautioned on Wednesday, adding that spiking prices will persist and potentially tie the central bank's hands.
With demand soaring, the resulting supply and labor bottlenecks are lighting a fire under prices. Although the Fed insists the effects are "transitory," Roubini — also known as "Dr. Doom" for his gloomy economic predictions — warned that the central bank won't be able to tighten monetary policy to slow down overheated economic growth.
“I’m on the side of those who believe that the rise in inflation is not going to be temporary, is going to be more persistent," Roubini told Yahoo Finance Live on Wednesday. "We have a massive monetary and fiscal stimulus, much bigger and more protracted than we had after the global financial crisis.”
The NYU economics professor pointed to a host of factors that include supply chain bottlenecks, pent-up demand from savings estimated to be at least $2 trillion, constraints to hiring workers, and companies hiking wages to attract workers.
In addition, Corporate America has warned on earnings calls that input costs are rising, along with jumps in commodity prices, home prices, and food prices.
“Inflation expectations are rising, the dollar is weakening, and that implies imported inflation and higher dollar price of commodities. And the Fed wants to overshoot 2% with the risk of the ongoing inflation expectation,” Roubini added.
'Fiscal dominance'
The economist pointed out that policies “are becoming ...pro-labor, pro-workers, pro-unions because there's been such a massive increase in income and wealth inequality" he said.
The massive federal stimulus is skewed heavily toward workers and "people who have been left behind,” he said — but in a way that's adding to the problem of soaring prices.
“So we're going to end up with high inflation and a wage-price spiral over time," Roubini explained.
"And the Fed cannot tighten because there is so much debt in the system, if they're going to try to tighten too soon, the system is going to crash. So they are in a debt trap. They're in a fiscal dominance," he added.
The economist is of the view that there will be a negative supply shock that will “hit the economy, reduce potential growth, increase the cost of production. And like in the '70s, with loose monetary and fiscal policy going to lead to stagflation, high inflation and also recession,” he added.
To be certain, a return to 70's style inflation is not the central bank's base case. Fed Chairman Jerome Powell said as much this week, telling Congress that such a scenario was "very unlikely" in his view.
Roubini, however, said several factors that could reduce potential output and boost the cost of production and the price of goods and services. Coupled with easy monetary and fiscal policy, prices could converge with stagnating growth ("stagflation") to create 1970s-like conditions.
Those elements include waning support for globalization, a rise in protectionism, strains between the U.S. and China, and rising inequality.
Julia La Roche is a correspondent for Yahoo Finance. Follow her on Twitter.
