- Banks are in a dangerous spot and a recession is foretold, according to Nouriel Roubini.
- The Fed is torn between cutting rates to ease volatility and raising rates to fight inflation, he said.
The US banking system is in a dangerous position, and the Fed can't win no matter what it does with interest rates, according to "Dr. Doom" economist Nouriel Roubini.
Roubini, who predicted the 2008 recession and is known for his gloom-and-doom prognostications on Wall Street, warned of trouble stemming from the recent collapse of Silicon Valley Bank, which has sparked fears of a banking crisis.
"It's an extremely dangerous moment, because there's now significant stress in some parts of the US banking system at a time when inflation is still too high," the top economist said in an interview with Bloomberg TV on Friday.
That leaves central bankers in a lose-lose situation, he said, as the Fed is torn between fighting inflation, which it does by raising interest rates, or lowering financial volatility, which it can do by easing rates.
Raising rates higher could spark more instability by shaking the banking system, but lowering rates in response to the turmoil could cause inflation to spiral out of hand again, leading to a stagflationary crisis, he warned.
"In some sense, the central banks now are damned if they do, damned if they don't," Roubini said.
That dilemma, combined with mounting debt levels, makes the US bound for a recession, he added. Known as a "permabear" on Wall Street, he has been warning for months of a downturn and a stagflationary-debt crisis, and previously predicted that stocks could plunge another 30% as the US battles high inflation, sluggish growth, and debt problems that rival the 2008 crisis.
"I think whatever they do, they're going to end up in trouble. Because at this point, it's too late to find a solution that prevents a hard landing and prevents severe financial stresses," he added.
That echoes the view of other commentators, who say a recession and more stock market pain are foretold. DataTrek co-founder Nicholas Colas told Insider he expected a downturn over the next year, and "Bond King" Jeff Gundlach said he saw a downturn coming over the next four months, pointing to a troublesome indicator in the US Treasury yield curve.
Markets are expecting the Fed to issue another 25-basis-point rate hike at their next policy meeting this week, before pausing monetary tightening efforts and cutting rates later in the year.
Central bankers have already raised interest rates 450 basis points over the last year to fight inflation, a move that threatens to push the US into recession and is partly responsible for the stark losses seen at SVB and other US banks, experts say.