Harvard economist warns US is heading for ‘significant’ recession

Harvard economist Kenneth Rogoff issued a stark warning about the US economy a day after Federal Reserve Chairman Jerome Powell maintained a hawkish stance.

“You really have to look at the world, which is going badly,” the economics professor told “Mornings with Maria” on Thursday. “So it’s very difficult for the United States to withstand this. Not only am I worried that we’ll have a mild recession, but I think the odds of us having a major recession are really, really high.”

The Federal Reserve on Wednesday raised its benchmark interest rate by 75 basis points for the fourth straight month as it struggles to rein in runaway inflation, a move that threatens to further slow U.S. economic growth and stifle US economic growth. exacerbate the financial difficulties of millions of households and businesses.

In his speech, Powell indicated that it is too early for the Fed to pause or pivot its stance on rate hikes.

“It’s very premature to think about taking a break,” Powell said at Wednesday’s press conference. “So people, when they hear delays, they think of a pause; it’s very premature, in my view, to think or talk about pausing our rate hike. We’ve got a ways to go.”

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Rogoff predicted the bank would be “very patient” in pushing rates up to the expected peak.

“If they really wanted to get inflation down to a 2-3% range in a sustainable way, they might need a fed funds rate of 6 or more,” he explained. “I don’t think they’ll go there, but that conversation hasn’t happened yet.”

Earlier this week, former Kansas City Federal Reserve Chairman and CEO Thomas Hoenig told host Maria Bartiromo that he feared the balance sheet shrinkage and withdrawal of market liquidity would create a dislocation.

“You hear people talking about liquidity in the Treasury market right now, there’s still a lot of liquidity in that market, and taking it out means you’re starting to constrain the economy and I think creating some uncertainty around the financial sector,” Hoenig said. said. “So it will be an addition to the inflation uncertainty as we move forward from here.”

Responding to Hoenig’s comments, Rogoff argued that the rate hikes are “much, much more important” than the reduction in liquidity in the market.

“Maybe Thomas Hoenig is right, but interest rate hikes will certainly put a lot of pressure on all levels,” Rogoff said. “[Powell’s] saying we’re going to keep raising rates because we know what to do if we tighten too much, we’ll cut. It’s funny, it’s a mirror of what they were saying earlier, “Well, we don’t want to raise rates because we know what to do if there’s inflation, but we don’t know what to do when there’s a recession.'”

Asked about the October jobs report, which is expected to show a gain of 200,000 jobs and a 3.6% rise in unemployment, Rogoff predicted that the labor sector would soon catch up with rate hikes.

“Productivity is just terrible, and are wages really higher than they look because of changes in working conditions, employers are distracted by pressures to tackle social issues, or just a global phenomenon? I don’t know what it is,” the economist admitted, “but it’s a real disconnect between what’s happening with growth and what’s happening with work.”

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With big bank CEOs signaling a strong consumer for the holiday season and the rest of the year, Rogoff echoed similar sentiments, saying the impact of Fed rate hikes is a “story of 2023”.

“Interest rate hikes take a long time to really eat away at the underlying economy,” the Harvard economist said. “Yeah, they got to stocks very quickly, but jobs production – lots of surveys in all of the literature suggest six to 12 quarters or more. So I think it’s all still to come.”

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Megan Henney of FOX Business contributed to this report.