According to former Morgan Stanley Asia head Stephen Roach, stagflation is making a return.
He cautions that the United States is on a risky road that will result in higher costs and weaker GDP.
“This inflation issue is broad, chronic, and likely to endure,” Roach said on Thursday on CNBC’s “Fast Money.” “The markets are nowhere near discounting the full scope of what will be necessary to rein down demand… That just adds to [Fed Chairman] Jerome Powell’s current predicament.”
Stagflation is Roach’s basic scenario, and the peak inflation argument is ludicrous, according to Roach, a Yale University senior scholar and former Federal Reserve economist.
“The Fed has completely lost sight of the demand side,” he remarked. “The Federal Reserve has a lot more tightening to accomplish.”
Roach predicts that inflation will remain over 5% until the end of the year. The Fed would not reach that level at the present rate of interest rate rises.
Investment trends and stock selections
“50 basis points is insufficient. And by excluding anything greater than that, he [Powell] is just indicating that his options are limited “Roach said. “That conclusion makes the markets uneasy.”
For the first time since 1932, the Dow is on track to have its eighth consecutive week of losses. The S&P 500 and the Nasdaq, which is heavily weighted in technology, are on course to have their worst weekly losing streaks since 2001.
Roach began warning about 1970s-style inflation dangers two years ago, when the epidemic was in in its early stages. He cited historically low interest rates, the Federal Reserve’s loose monetary policies, and the country’s massive debt as examples.
Last September, on CNBC, he increased the volume of his warning. Roach warned that stagflation was only a supply chain malfunction away in the United States.
He now sees even more reasons to be on the lookout.
“I would add zero-Covid in China, as well as the ramifications of the Ukraine conflict,” Roach remarked. “Over the next few years, this will maintain the supply side well-extended in terms of obstructing price discovery.”