August 30, 2022 20:53 PM
Stephen Roach, a senior fellow at Yale University and former Morgan Stanley Asia chairman.
[Global Market Report]Stephen Roach, a senior researcher at Yale University and former chairman of Morgan Stanley’s Asia region, believes that the negative economic growth in the United States in the first half of this year may be a fore-shock to a more severe recession, which may last until 2024 .
Roach warned that the U.S. needs a “miracle” to avoid a recession.
“As the lagged effects of monetary tightening kick in, we’re definitely going to be in a recession,” he said in an interview on Monday. “They’re not working right now.”
Roach, a former Fed economist, believes Fed Chairman Jerome Powell has no choice but to adopt Paul Volcker’s tightening approach. In the early 1980s, then-Federal Reserve Chairman Volcker raised interest rates sharply to curb runaway inflation.
“Going back to the pain Paul Volcker forced the U.S. economy to endure to tame inflation. He has to get unemployment above 10 percent,” he said. “If the Fed under Jerome Powell keeps its promises, , stay disciplined and get the federal funds rate into restrictive territory, and we won’t be in a recession. And that restrictive area is still a long way from where we are right now.”
The U.S. unemployment rate remains at 3.5 percent, the lowest level since 1969, despite the Federal Reserve raising interest rates sharply this year. That could change when the U.S. Bureau of Labor Statistics releases its August report on Friday. Unemployment will definitely start to climb, Roach predicts.
“So far, that hasn’t happened and the Fed has tightened significantly, which shows they still have a lot of work to do,” he noted. “Unemployment could go above 5%, hopefully not higher than that. A lot. But it could go up to 6%.”
The ultimate tipping point may be consumers. Roach speculates that consumers will soon capitulate due to persistent inflation. Once that happens, he expects the cut in spending will ripple through the wider economy and cause pain in the labor market.
“Our economy (GDP) is going to have to come down around 1.5 to 2 percent cumulatively. And the unemployment rate is going to go up by at least 1 to 2 percentage points,” Roach said. “That’s going to be a garden variety. decline.”