Nouriel Roubini, known for anticipating the mortgage collapse that sparked the 2008 financial crisis, warned on Tuesday that the Federal Reserve could be afraid and not dare to tighten rate policy if growth slows and markets spiral into sales as happened in the fourth quarter of 2018. “They are going to collapse,” the president and CEO of Roubini Macro Associates said Tuesday in an interview in Dubai with Bloomberg Television. “They are going to postpone the end of ‘tapering’ or the rate hike.”
Stagflation, a situation that terrifies the markets, in which growth stagnates while inflation registers large increases, will persist “for several quarters,” Roubini warned. The US personal consumption staples price index will register rises of more than 3% next year, he said.
Concern about the persistence of inflation has increased as oil, coal and natural gas prices rise, adding to existing pressures pushing prices up in many sectors. Bottlenecks in global supply chains and labor shortages in much of Western countries are significantly driving core and headline inflation and at the same time hurting economic growth, Roubini said.
“All of these factors together make for a very difficult dilemma for central banks,” he said. If growth slows, the Fed “will end up being as dovish as possible.”
Slower GDP growth in the US will make it unlikely that the Fed will raise rates at meetings next year, although the reduction in asset purchases is expected to be announced at the next meeting of the Open Markets Committee, it said on Monday. Jan Hatzius, chief economist at Goldman Sachs.
If the Fed goes moderate and inflation becomes volatile, US bond yields will rise further as investors demand a higher inflation risk premium, Roubini said.
Investors can hedge against the risk of higher inflation by selling short-duration bonds or investing in inflation-protected Treasury bills, which vary in interest rates at the rate of the CPI, he said. Commodities, such as gold, metals, oil and some forms of real estate, such as infrastructure, will also offer protection against price rises, he said.
Oil prices could reach $ 100 per barrel in the coming months, almost a 25% rise compared to the $ 83 recorded by WTI this Tuesday, thanks to – or because of – the “perception of scarcity” that dominates the market, Roubini said. However, that will also depend on whether the OPEC + alliance will regain supply levels and whether Iran will be able to return to global oil markets, he explained. “I see an upward trend in the prices of oil, coal, natural gas and other energies,” he said. “The demand is growing.”