Nouriel Roubini takes note of presidential hopefuls on the risk of stagflation

Stagflation was a big part of the conversation in financial markets in 2022-23, but no more.

The term refers to a combination of high inflation and stagnant economic growth. But those diseases are absent in today’s environment.

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Last week, the government reported that nonfarm payrolls rose by 254,000 in September from 159,000 in August. And the unemployment rate fell to 4.1 percent from 4.2 percent. These figures exceeded expectations.

So the economy is looking pretty good, with the Federal Reserve Bank of Atlanta’s forecast model calling for annual GDP growth of 3.2% in the third quarter. This is an increase from the actual growth of 3% in the second quarter.

Economist Nouriel Roubini was praised for predicting the financial crisis of 2007-2009

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Calm image of inflation

Also, the inflation front looks pretty good. Consumer prices rose by 2.4% in the 12 months to September. While this was slightly ahead of economists’ forecasts, it is down from 2.6% in August.

The Fed has a 2% target for inflation. And his favorite inflation gauge, the price index for personal consumption expenditures, was very close to that level in August – 2.2% from a year earlier.

Put it all together, and “investors should be reassured that the economy is doing well, the labor market and consumer spending are both holding up well, and there appear to be no signs of a recession,” Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, wrote in a comment.

Related: Druckenmiller, Summers send Fed straight messages on interest rates

Personal consumption expenditures rose 0.2% in August from July.

The Fed cut interest rates by 0.5 percentage points last month to prevent a recession. But after the latest economic numbers, experts expect a smaller cut at the Fed’s next meeting on November 6-7.

Interest rate futures show an 80% chance that the central bank will cut by 25 basis points (0.25 percentage points) next meeting and a 20% chance of no change.

“Disinflation continues,” the analyst says

“Disinflation continues, but anyone who thought the Fed would cut rates another 50 basis points in November is dead wrong,” Jamie Cox, managing partner at financial advisory firm Harris Financial Group, wrote in a commentary.

“While interest rates are not high enough to dampen growth, they are also not high enough to completely suppress inflation. The Fed will cut rates, but at a measured pace from here.”

Related: Debate rages over how fast to cut interest rates

Meanwhile, the possibility of stagflation may be off the table for now. But it could return soon, depending on the policies of Kamala Harris or Donald Trump.

Each called for large increases in public spending and tax cuts, both of which were inflationary. And if the Fed has to raise rates to combat such inflation, that could depress economic growth.

Roubini sees Trump creating a greater risk of stagflation

So which candidate poses a greater economic threat?

“Trump’s mix of trade, currency, monetary, fiscal, immigration and foreign policy poses far greater risks of stagflationary outcomes than if Kamala Harris were elected,” economist Nouriel Roubini said at a conference this week, according to Bloomberg.

“Trade” refers to the tariff increases Trump has promised, which are inflationary. “Currency” refers to Trump’s preference for a weaker dollar, which is also inflationary.

More economic analysis:

• Goldman Sachs analyst revises S&P 500 targets for 2024, 2025
• PCE inflation report resets bets on another big Fed rate cut
• Why stocks are rising and the rally is underway

“Immigration” refers to Trump’s threat to deport illegal immigrants and make sure others don’t enter. This could lead to a labor shortage, which could fuel inflation and stifle economic growth.

To avoid the downside, Roubini recommends investors buy gold, short-term bonds and inflation-protected Treasuries.

He made a name for himself by correctly predicting the 2007-09 financial crisis, earning him the nickname “Dr. Doom”.

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