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Sticky Inflation Ahead: Why Central Banks Aren’t Done Tightening, Says ‘Dr. Doom’

Notorious economist Nouriel Roubini, often referred to as “Dr. Doom”, is challenging the prevailing market sentiment that central banks are nearing the end of their rate-hiking cycle due to inflation likely persisting longer than expected.

In a recent interview with Bloomberg, Roubini painted a different picture, one where central banks continue to hold steadfast in their commitment to combat inflation as prices remain stubbornly high worldwide. He noted that the current presumption of market participants is that central banks have finished their rate-raising agenda, suggesting that they might soon return to a zero-rate policy.

This perspective has fuelled a resurgence in speculative investments predicated on a sharp downturn in inflation and a subsequent pivot by the Federal Reserve towards an easing monetary policy. These assumptions have even powered the S&P 500 to hit 4,200 recently, a first since August, delivering an 8% year-to-date gain despite an uncertain macroeconomic environment.

According to Roubini, the real surprise of the year might be that inflation doesn’t recede as much as central banks are hoping. This could put central banks in a tough spot, facing the choice between hiking rates—risking a harsh landing and financial instability—or leaving rates untouched, potentially anchoring inflation and inflationary expectations.

The Federal Reserve has been aggressive in its anti-inflationary efforts, implementing ten consecutive rate hikes since March 2022. The institution will reconvene in the coming month to deliberate on its next steps.

While many investors are optimistic about a potential short, shallow recession leading to interest rate cuts, Roubini warns that central banks are signaling that they’re not finished tightening monetary policy just yet.

On a different note, esteemed economist Mohamed El-Erian has expressed his admiration for the stability exhibited by markets amid considerable uncertainties such as the Federal Reserve’s dilemma, the debt ceiling stalemate, and tightening credit conditions. In a recent chat with CNBC, El-Erian also pointed out the positives, noting the resilience of the U.S. labor market and the dynamic entrepreneurial activities contributing to potential productivity gains.