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U.S. needs miracle to avoid recession, economist Stephen Roach warns

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Negative economic growth within the 12 months’s first half could also be a foreshock to a much deeper downturn that would last into 2024.

Stephen Roach, who served as chair of Morgan Stanley Asia, warns the U.S. needs a “miracle” to avoid a recession.

“We’ll definitely have a recession because the lagged impacts of this major monetary tightening begin to kick in,” Roach told CNBC’s “Fast Money” on Monday. “They have not kicked in in any respect straight away.”

Roach, a Yale University senior fellow and former Federal Reserve economist, suggests Fed Chair Jerome Powell has no selection but to take a Paul Volcker approach to tightening. Within the early 1980’s, Volcker aggressively hiked rates of interest to tame runaway inflation.

“Return to the variety of pain Paul Volcker needed to impose on the U.S. economy to ring out inflation. He needed to take the unemployment rate above 10%,” said Roach. “The one way we’re not going to get there’s if the Fed under Jerome Powell sticks to his word, stays focused on discipline, and gets that real Federal funds rate into the restrictive zone. And, the restrictive zone is a protracted ways away from where we’re straight away.”

Despite the Fed’s sharp rate of interest hike trajectory, the unemployment rate is at 3.5%. It matches the bottom level since 1969. That would change on Friday when the Bureau of Labor Statistics releases its August report. Roach predicts the speed is sure to start out climbing.

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“The indisputable fact that it hasn’t happened and the Fed has done a major monetary tightening so far shows you ways much work they need to do,” he noted. “The unemployment rate has got to go probably above 5%, hopefully not a complete lot higher than that. But it surely could go to six%.”

The last word tipping point could also be consumers. Roach speculates they are going to soon capitulate on account of persistent inflation. Once they do, he predicts the pullback in spending will reverberate through the broader economy and create pain within the labor market.

“We will need to have a cumulative drop within the economy [GDP] somewhere of around 1.5% to 2%. And, the unemployment rate goes to need to go up by 1 to 2 percentage points in a minimum,” said Roach. “That will be a garden variety recession.”

‘Cold war’ with China

The prognosis abroad is not significantly better.

He expects the worldwide economy may also sink right into a recession. He doubts China’s economic activity will cushion the impact, citing the country’s zero-Covid policy, serious supply chain backlogs and tensions with the West.

Roach is especially anxious concerning the U.S. and China relationship, which he writes about in his latest book “Accidental Conflict: America, China and the Clash of False Narratives” due out in November.

“Within the last five years, we have gone from a trade war to a tech war to now a chilly war,” Roach said. “Once you’re on this trajectory of esclating conflict as we now have been, it doesn’t take much of spark to show it into something much more severe.”

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