'Dr Doom' economist Nouriel Roubini says investors are 'delusional' if they expect the Fed to pivot to cutting interest rates next year
- Stocks have rallied as investors hope inflation has peaked and the Federal Reserve will turn dovish.
- But Nouriel Roubini has warned not to expect the Fed to slow its pace of interest rate hikes in 2023.
Markets are "delusional" if they expect the Federal Reserve to start pulling back on interest rate hikes any time soon, according to Nouriel Roubini.
The economist — often labeled "Dr Doom" because of his bearish predictions — said the current 8.5% rate of US inflation makes it highly unlikely that the Fed will change its approach in 2023.
"Markets are expecting a pivot, and the Fed cutting next year," Roubini told Bloomberg TV on Monday. "To me [that] sounds delusional."
US stock markets have rallied in recent weeks after Chair Jerome Powell pledged the Fed would take a data-dependent approach to rate hikes. Market bulls believe that July's lower-than-expected inflation data will give the Fed scope to pivot to a less aggressive stance at its September meeting, setting the stage for interest rate cuts next year.
But the rate of price rises is still too high for that to be realistic, according to Roubini. He said the Fed will have to hike rates by another 150 basis points to bring the rate down to its target 2% level.
"Inflation in the United States is still at 8.5%. It might have peaked, but the question is how fast it's going to fall," he said. "I don't think the monetary policy is tight enough to push inflation to 2% fast enough."
"The Fed funds rate should be going well above 4% to push inflation towards 2%," he added. "If that doesn't happen, inflation expectations are going to get unhinged, or you'll get a hard landing."
Roubini also believes there's a heightened risk of a US recession, which would be another headwind for stocks.
"We are in a sharp slowdown, we've had two negative quarters of growth in the first half [of 2022]. We're going towards a recession," he told Bloomberg. "The recession is going to be long, protracted, severe, and associated with financial distress across the board."
Roubini, who teaches economics at New York University, is the chairman of Roubini Macro Associates. He was described as a "permabear" by the New York Times as early as August 2008 after he sounded the alarm over the housing crisis that eventually triggered the Great Recession.