Central Banks Won’t Cut Rates Soon, Inflation Too High

  • Nouriel Roubini says markets are wrong to think the Fed is about to cut interest rates.
  • Inflation is still too high despite the central bank’s policy efforts, the “Dr. Doom” economist said.
  • There’s a looming risk of “financial stability” in markets and “a correction [to] the economy.”

“Dr. Doom” economist Nouriel Roubini says investors are wrong to assume central banks will stop tightening soon because inflation is going to stay stickier for longer. 

Instead, markets should be anticipating more committement to fighting inflation from central banks as prices stay high around the world.

“In equity markets, I think people think that central banks are done with raising rates and therefore they’re going to cut rates to zero,” Roubini told Bloomberg on Wednesday, adding that monetary authorities like the Fed may increase borrowing costs again in June. 

This belief has led to a revival in speculative bets on the assumption that inflation is going to fall sharply and the Fed will then pivot to easing monetary policy. Earlier this month, the S&P 500 touched 4,200 for the first time since August. The index is up 8% year to date despite a murky macroeconomic outlook.  

“There’s still a lot of inflation around the world,” Roubini said. “The big surprise this year is going to be [that] inflation is not going to fall as much as central banks expect.”

He added: “Therefore, the central banks will have to make a tough choice of either raising rates [which brings] more of the risk of a hard landing and financial instability or not raising rates, but then you’re going to have the anchoring of inflation and inflation expectations.”

The Fed has delivered 10 consecutive rate hikes since March 2022 in an effort to rein in inflation and cool the economy. Central bankers will gather again for another policy meeting next month to discuss the Fed’s next move. 

“There may be a short and shallow recession that’s going to lead them to cut interest rates,” he added. “So, the markets are quite bullish about the short and shallow recession or even a soft landing and then a recovery of the markets.”

“The thing central banks are telling them is, ‘No, we’re not done yet. We’re not going to cut rates this year,'” he added. 

Elsewhere, veteran economist Mohamed El-Erian has been “very impressed by how stable” markets have been recently as the US faces major uncertainties like the Fed’s predicament, the debt ceiling saga, and tightening credit conditions. 

Still, there’s “a lot of good things happening in the US economy,” El-Erian told CNBC on Tuesday. “The labor market remains strong…There’s a lot of entrepreneurial activities going on. There is reason to be positive about productivity gains.”

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