Morgan Stanley’s Stephen Roach: ‘Go Back to the Pain Paul Volcker Had To Impose on the U.S. Economy’

Aug. 31, 2022 (EIRNS)—“Go back to the type of pain Paul Volcker had to impose on the U.S. economy to wring out inflation,” were the instructions transmitted by Morgan Stanley Asia head Stephen Roach, in supporting Fed chief Jerome Powell’s marching orders delivered to the world financial community gathered at Jackson Hole on Aug. 26. Roach, who is also a former Fed economist, spoke to CNBC on Aug. 29, and said that he sees the U.S. sinking into a deep economic downturn lasting into 2024, and that it will take a “miracle” to avoid a recession. “We’ll definitely have a recession as the lagged impacts of this major monetary tightening start to kick in,” Roach warned, adding, “They haven’t kicked in at all right now,” reported CNBC on Aug. 29.

Roach backed Powell’s threat to return to Volcker-style leaps in interest rates. “Go back to the type of pain Paul Volcker had to impose on the U.S. economy to ring out inflation. He had to take the unemployment rate above 10%.... The only way we’re not 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. And, the restrictive zone is a long way away from where we are right now.... “We’re going to have to have a cumulative drop in the economy [GDP] somewhere of around 1.5% to 2%. And, the unemployment rate is going to have to go up by 1 to 2 percentage points in a minimum. ... That would be a garden variety recession.”