CNBC: Stephen Roach Calls Stagflation His Base Case, Warns Market is Unprepared for the Consequences

Article by Stephanie Landsman in CNBC financial

Stagflation is making a comeback, according to former Morgan Stanley Asia chairman Stephen Roach.

He warns the U.S. is on a dangerous path that leads to higher prices coupled with slower growth.

“This inflation problem is widespread, it’s persistent and likely to be protracted,” Roach told CNBC’s “Fast Money” on Thursday. “The markets are not even close to discounting the full extent of what’s going to be required to bring the demand side under control... That just underscores the deep hole [Fed chief] Jerome Powell is in right now.”

Roach, a Yale University senior fellow and former Federal Reserve economist, calls stagflation his base case and the peak inflation debate absurd.

“The demand side has really gotten away from the Fed,” he said. “The Fed has a massive amount of tightening to do.”

Roach expects inflation to stay above 5% through the end of the year. At the current pace of interest rate hikes, the Fed wouldn’t meet that level.

“0.5% doesn’t cut it. And, by ruling out something larger than that he [Powell] just sends a signal that his hands are tied,” added Roach. “The markets are uncomfortable with that conclusion.”

The Dow is on pace for its eighth negative week in a row for the first time since 1932. The S&P 500 and the tech-heavy Nasdaq are tracking for their worst weekly losing streaks since 2001.

Roach started sounding the alarm on 1970s-type inflation risks .......

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