Economist Says 'Miracle' Needed To Save US From Recession, Predicts 2% GDP Slump

The Federal Reserve building

KEY POINTS

  • Roach said the U.S. ‘will definitely have a recession’ as a result of ‘major monetary tightening’
  • Roach also predicted a GDP slump of 1.5% to 2%
  • Many economists previously indicated that they expect a mid-2023 recession

The Chair of leading private equity investment firm Morgan Stanley Asia has said that the United States needs a “miracle” to avoid a recession, adding that the Federal Reserve may need to utilize the same inflation-curbing method used by former Fed Chair Paul Volcker.

Speaking with CNBC’s “Fast Money” Monday, former Federal Reserve economist Stephen Roach said the U.S. will “definitely have a recession as the lagged impacts of this major monetary tightening start to kick in.” Roach said the “impacts” of monetary tightening “haven’t kicked in at all right now,” and a “miracle” may be the only way to avoid a recession.

Roach went on to recommend that current Fed Chair Jerome Powell needs to “go back to the type of pain Volcker had to impose on the U.S. economy to ring out inflation.” Roach was referring to the strategy of Volcker in the early 1980s, wherein the Fed hiked interest rates in an aggressive manner to hold back high inflation. At that time, the unemployment rate went above 10%.

While the U.S. economy is being beaten down in various aspects, such as unemployment, Roach believes the biggest setback will show in spending, as consumers begin to pull back on spending and this could largely affect U.S. gross domestic product (GDP).

“We’re going to have a cumulative drop in the economy [GDP] somewhere of around 1.5% to 2%,” Roach predicted. The Yale University senior fellow went on to project that once the economy sees a 2% drop and the unemployment rate hikes by up to 2 percentage points minimum, the U.S. would see “a garden variety recession.”

Roach’s warnings came about a week after a poll by the National Association of Business Economics (NABE) found that 72% of economists polled are expecting a U.S. recession to kick off by mid-2023 if an early recession hasn’t started yet.

The poll also found that 19% of economists believe the U.S. is already in recession, while 20% believe the recession will take place by the second half of 2023.

The biggest issue that economists argued about in the poll was how the Fed would roll back inflation numbers. About 73% of economy forecasters polled said they are not confident or not too confident that the Federal Reserve can pull inflation back in the next two years without recession as a result.

Meanwhile, several government officials have expressed fears about the impact of hiking interest rates. Sen. Elizabeth Warren, D-Mass., said she’s “very worried that the Fed is going to tip this economy into recession.”

Senate Minority Leader Mitch McConnell, R-Ky., said the key to combatting high inflation is moderation in fiscal spending. McConnell said the recession is likely and blamed Democrats for their “mass spending bills,” which he said led to the “calamity” that the U.S. is experiencing.

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