Former Fed economist Stephen Roach sheds light on recession concerns

Stephen Roach, Senior Fellow at Yale University’s Jackson School of Global Affairs, appeared on CNBC’s “Fast Money” where he said the U.S. needs a “miracle” to avoid a recession. 

Roach served as chair of Morgan Stanley Asia and is a former Federal Reserve economist. During the interview, he said a recession is inevitable at this point. “We’ll definitely have a recession as the lagged impacts of this major monetary tightening start to kick in,” he said. “They haven’t kicked in at all right now.”  

He suggested Fed Chair Jerome Powell would need to hike interest rates further and raise unemployment numbers by 1-2%, similar to the approach Paul Volker took in the 1980s. Currently, the unemployment rate stands at 3.5%, but the number could change on Friday when the Bureau of Labor Statistics releases its August report. Roach predicts the rate will increase.  

“Go back to the type of pain Paul Volker had to impose on the U.S. economy to ring out inflation. He had to take the unemployment rate above 10%,” said Roach. “The only way we’re going to get there is 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.”  

Roach also pointed to consumer spending habits as the probable tipping point into a recession. He predicts inflation will result in a pullback in spending that will likely affect the whole economy. “We’re going to have to have a cumulative drop in the economy (GDP) somewhere of around 1.5% to 2%,” Roach said. When coupled with an unemployment rate increase of 1 to 2 percentage points, “that would be a garden variety recession,” he said.  

Roach also explained that a global recession is likely on the horizon as the U.S.-China relationship deteriorates. “In the last five years, we’ve gone from a trade war to a tech war to now a cold war,” he said. “When you’re in this trajectory of escalating conflict as we have been, it doesn’t take much of a spark to turn it into something far more severe.”

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