While inflationary fears are picking up, the markets have not demonstrated a readiness to accept higher interest rates. In fact, rising nominal treasury yields over the past few months have, on several occasions, prompted market selloffs.
This predicament puts the Federal Reserve in a tough position, said Nouriel Roubini, CEO of Roubini Macro Associates and professor at the NYU Stern School of Business, because should the Fed raise interest rates to try to control inflation, the market may see a return of 2013’s “taper tantrum”.
“Either the Fed, at that point, keeps on saying things are temporary, inflation expectations start to rise, they control the short end of the yield curve, but then long rates can rise in nominal and real terms, that’s one risk. Then, inflation gets out of control. Or, like in 2013, they have to backpedal and say no, there is a problem with inflation and we have to start tapering sooner than we said, we need to start raising rates sooner than we said, and we could have a repeat of what happened in 2013,” Roubini told Michelle Makori, Kitco’s editor-in-chief.
0:00 - Is inflation transitory?
4:33 - Is Biden spending economy back into recession?
7:30 - Is Fed still independent?
9:30 - When is next rate hike?
12:03 - What happens next?
Original video: https://www.youtube.com/watch?v=ZDq3hMoZ8XE
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