Roubini NBR Interview on 0 Percent Interest Rate

Author: Nouriel Roubini  ·  March 18th, 2010  ·  258564http%3A%2F%2Fwww.economonitor.com%2Fnouriel%2F2010%2F03%2F18%2Froubini-nbr-interview-on-0-percent-interest-rate%2FRoubini+NBR+Interview+on+0+Percent+Interest+Rate2010-03-18+09%3A41%3A23Nouriel+Roubinihttp%3A%2F%2Fwww.economonitor.com%2Fnouriel%2F2010%2F03%2F18%2Froubini-nbr-interview-on-0-percent-interest-rate%2F › Share This Print

NBR — Roubini Global Economics Chairman, Nouriel Roubini on 0 Percent Interest Rate (Click for Video [9:17] and report)

NBR:

SUSIE GHARIB: Joining us now with more analysis about today’s Fed decision, noted economist Nouriel Roubini, chairman of Roubini Global Economics. How Nouriel. How are you doing?

NOURIEL ROUBINI, CHAIRMAN, ROUBINI GLOBAL ECONOMICS: Very well. Hi. Good being with you.

GHARIB: Good. Let me just start off by asking you, do you think the Fed is doing the right thing by keeping interest rates so low, at 0 percent?

ROUBINI: Well, yes, in the sense that the economy is still very weak and the recovery is anemic. Unemployment is going to be remaining high. There are more downsides rather than upside risks. So I expect the Fed’s going to keep the Fed funds rate at zero through the middle of next year. And they might even do more quantitative easing. Even today, they signaled they may end that program at the end of March. If there was a backup in mortgage rates and that’s something you cannot exclude, the last thing you can afford in an election year is a sharp increase in mortgage rates when construction activity is still very weak. So I expect more easy money (INAUDIBLE).

GHARIB: Well, putting the political aspect of this aside, you heard in our reporting that the one policy maker, Tom Hoenig, voted against keeping interest rates low. He says that it increases risks to the financial stability. In your view, what does that mean? What are the risks?

ROUBINI: Well, on one side we need lower rates because the recovery of the real economy is still very anemic. On the other side, by keeping rates so low, we’re planting the seeds of the next asset bubble, because easy money means a (INAUDIBLE) rough trading, dollar funded (INAUDIBLE) trades, and a lot of increasing asset prices U.S. and globally looks like now the beginning of another asset bubble that might lead to further financial instability. So we are between a rock and a hard place, because we need zero rates for the real economy, and we have (ph) to tighten sooner rather than later to avoid another bout of financial instability.

GHARIB: You heard our report just a moment ago about the debate over whether the next bubble might be a bond bubble in the bond market. What is your view on that?

ROUBINI: Well, for the time being, I expect that long-term bond yields in the U.S. are going to remain low because growth is going to be weak. You’ll have deflation. You’ll have bouts of risk aversion. The Fed is committed to keep zero rates. The Fed might do more QE. The rest of the world is buying and accumulating (ph) reserves to the rate of $1 trillion annualized to prevent their currency from appreciating. That’s going to U.S. Treasury, and for the first time in a decade, we have some domestic financing of the U.S. fiscal deficit because savings have gone up, so we don’t depend on the kindness of strangers. Given all that, I don’t expect (INAUDIBLE) bond yields to spike for the time being, but if after the election, we’re a divided government, we have (ph) run-away fiscal deficit (INAUDIBLE) monetize them, then at some point even in the U.S., the bond market vigilantes may wake up the way they did in Greece and UK, around Europe and then you could have a spike in rates. That’s a 2011 story, not this year.

GHARIB: Let me get a little more of your view on the economy. You said it was anemic. In the Federal’s policy statement, they said that the job market is stabilizing, business spending has risen significantly, but that new housing construction is at a depressed level. So what is basically the view of the economy? How is it really doing?

ROUBINI: Well, in my view, the recovery is going to be extremely anemic because consumers have to save more to deleverage, therefore consumption growth is going to be anemic, with a glut of capacity, and therefore spending is going to be anemic. Real estate and commercial real estate are still in a major slump. Given the glut of capacity, there is still some evidence of a credit crunch. And there is talking of inventories in the fiscal stimulus going to disappear by the second half of the year. So I expect that while the first half might be growth closer to 3 percent. But the second, we can go back to 1.5 percent growth, which is well below potential.

GHARIB: How about negative growth because you have been warning about the economy slipping back into recession. Are you less worried about that?

ROUBINI: Well, you know, my basic scenario is a U-shaped anemic recovery. There is a downside risk of a double-digit recession, low probability, but if growth is going to be only 1.5 percent, it is going to feel like a recession, even if we’re technically not in a recession.

GHARIB: OK, we’re going to have to leave it there. Nouriel Roubini, thank you so much for coming on our program.

ROUBINI: A pleasure.

GHARIB: My guest tonight, Nouriel Roubini, chairman of Roubini Global Economics.