Stephen Roach calls stagflation its base case and warns the market is unprepared for the consequences


Stagflation is back, according to Stephen Roach, former chairman of Morgan Stanley Asia.

He warns that the United States is on a dangerous path that leads to higher prices coupled with slower growth.

“This inflation problem is widespread, it’s persistent and likely to be prolonged,” Roach told CNBC’s “Fast Money” on Thursday. “Markets aren’t even close to pricing in the full magnitude of what will be needed to rein in demand… This only underscores the deep hole [Fed chief] Jerome Powell is right now.”

Roach, a senior fellow at Yale University and a former Federal Reserve economist, calls stagflation a base-case scenario and the peak inflation debate absurd.

“Demand has really moved away from the Fed,” he said. “The Fed has a lot of tightening to do.”

Roach expects inflation to stay above 5% until the end of the year. At the current pace of interest rate hikes, the Fed would not reach that level.

CNBC Pro Stock Picks and Investing Trends:

“50 basis points is not enough. And, excluding anything bigger than that, it [Powell] just sends a signal that his hands are tied,” Roach added. “The markets are uncomfortable with that conclusion.”

The Dow Jones is poised for its eighth consecutive negative week for the first time since 1932. The S&P 500 and the tech-heavy Nasdaq are on the hunt for their worst weekly losing streaks since 2001.

Roach began sounding the alarm about 1970s-style inflation risks two years ago, at the start of the pandemic. He listed historically low interest rates, the Fed’s easy money policies and the country’s huge debt.

His warning grew louder last September on CNBC. Roach warned that the US was one supply chain problem away from stagflation.

And now he sees even more reason to go on alert.

“I would add to this zero-Covid in China as well as the repercussions of the war in Ukraine,” Roach said. “This will keep the supply well-extended in terms of price discovery lock-in over the next few years.”

CNBC’s Chris Hayes contributed to this report.

Warning