Tuesday, March 25, 2014

VIDEO - Nouriel Roubini: Fed risks creating Bubble

Discussing QE and when the Fed will raise interest rates, with Nouriel Roubini, Roubini Global Economics co-founder and chairman.

well, they can now start as they have tapering qe and they'll be done with qe by october. that said, they're going to be on hold for at least six months and what janet yellen meant was not that that was a ceiling, but it was a floor to how much they're going to be on hold before they're going to normalize. they're going to normalize slowly. you think that's a good idea? i think part of the signal by the fed is the correct one. there's, of course, a reason they're going to go too soon. changing the composition you have new now hawksisher, prosser. the composition is rather different. up to four new members of the board, three for sure, maybe four, having new voting members. so janet yellen matters, but under the bernanke, the fed became a collegial democracy not the monarch which it was under greenspan. the genie is out of the bottle. she has to be collegial. she's one vote out of 12, an important one. do you think they could make a mistake here then? well, two types of mistake they could do. one to start too soon and hike too much and that could lead to market consequences like we saw last year when there was a surprise from the fed tapering. another one could occur right now. the other mistake is they could start too late and normalize very slowly not in terms of risk of goods inflation, but asset inflation. last time around it took them two years to normalize from 5 to 25. created the biggest housing, real estate equity bubble. this time around they'll be on hold for another year. they'll normalize very slowly. take them up to four years to go from zero to 4%. the risk is we'll create another huge bubble in the economy. that's a big risk. i was going to say to that point about 4% before we move on, is that the normal policy rate anymore? yes. there's a huge discussion right now as to whether that rate has moved lower because -- it has. neutral fed funds rate used to be 6.5% two cycles ago, then 5.25%. now the fed agrees it's 4%. long-term inflation is going to be 2%. the real feds fund rate is neutral. therefore, the new neutral rate is going to be 4%. none of this is happening in a vacuum. i mean, it's still full speed ahead in europe and in japan with their monetary easing process over there. does it give them a greater advantage as we begin tapering at this time? what do you think of what's going on in europe and in japan right now? i think europe and japan, they need more monetary easing. in japan the consumption tax will slow the growth. markets were expecting the boj would start easing before april. they have not done so. that's why the yen has been strengthening and the stock market has been falling. i'm sure there will be more easing by the boj. the question is not whether, but when. i think it's going to be in july when they see the feks of the consumption tax. the ecb is still on hold. they should have another rate cut, credit easing possibly, even quantitative easing. they will eventually get there but later than the markets are

Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics
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