US economist Nouriel Roubini has warned investors of a sell-off in bonds and stocks as the Federal Reserve is forced to keep interest rates high to fight stubborn inflation. The chairman of Roubini Macro Associates, known for his doom and gloom predictions, said consumer price growth is not slowing down fast enough and the market will reconsider the 60 basis point rate cuts currently priced into swaps for later this year. The central bank is in a “very serious trilemma” as it tries to achieve price stability, growth stability and financial stability, Roubini said in an interview with Bloomberg TV. Achieving this with a single policy tool, fed funds rates, seems an impossible task to me.
Roubini has issued this warning before, and it is backed up by the latest economic data. US gross domestic product grew at an annualized rate of 1.1 percent in the first three months of the year, falling short of economists’ median estimate of 1.9 percent, data this week showed. The GDP inflation rate rose four percent from an expected rate of 3.7 percent.
Rising fragmentation among world powers, particularly between the US and China, is also creating headwinds for the economy as countries risk curbing free trade, he said. Roubini also warned that the US is already in a credit crunch after three mid-tier lenders – a major source of credit for households and businesses – collapsed last month. Data released on Thursday shows banks have increased emergency lending with the Fed for the second straight week.