According to former Morgan Stanley Asia CEO Stephen Roach, stagflation is making a comeback.
He warns the US is on a dangerous path that will lead to higher prices and slower growth.
“This inflation problem is widespread, it’s persistent and it’s likely to be protracted,” Roach told CNBC’s Fast Money on Thursday. “Markets are nowhere near ready to anticipate the full extent of what it will take to bring the demand side under control… It only underscores the deep hole [Fed chief] Jerome Powell is on it right now.”
Roach, a senior fellow at Yale University and a former Federal Reserve economist, calls stagflation his base case and the debate over peak inflation absurd.
“The demand side has really moved away from the Fed,” he said. “The Fed must tighten massively.”
Roach expects inflation to stay above 5% through the end of the year. At the current pace of rate hikes, the Fed would not reach that level.
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“50 basis points are not enough. And by excluding something bigger, he has [Powell] “It’s just sending a signal that its hands are tied,” Roach added. “The markets are uncomfortable with that conclusion.”
The Dow is on track for its eighth consecutive negative week for the first time since 1932. The S&P 500 and the tech-heavy Nasdaq are chasing their worst weekly losing streak since 2001.
Roach began sounding the alarm about the inflationary risks of the 1970s two years ago, in the early stages of the pandemic. He listed historically low interest rates, the Fed’s easy money policy and the country’s massive debt.
His warning grew louder on CNBC last September. Roach warned that the US is one supply chain failure away from stagflation.
And now he sees even more reasons to be on the alert.
“I would add to this zero Covid in China along with the impact of the war in Ukraine,” Roach said. “That will keep the supply side well developed in terms of pricing constipation over the next few years.”
CNBC’s Chris Hayes contributed to this report.
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