Roubini, on Friday in an opinion piece on Project Syndicate, voiced concerns about Kevin Warsh’s stance on unwinding the Fed’s balance sheet and said that due to the Iran war, Fed may raise interest rates.
- Roubini said that Warsh, once confirmed, will quickly get a ‘reality check’.
- As per Roubini, recent economic data suggests that U.S. growth remains above potential, while inflation remains stubbornly above the Fed’s 2% target.
- Protracted war with Iran that sends oil prices higher and puts upward pressure on inflation and inflation expectations, Roubini noted.
Renowned economist Nouriel Roubini has reportedly raised concerns about President Donald Trump’s Federal Reserve chair nominee Kevin Warsh and his policy viewpoints, adding that once confirmed, he will quickly get a “reality check”.
In an opinion piece published in the Project Syndicate on Friday, Roubini said that Kevin Warsh’s policy positions for years, if put into practice after he becomes Fed chair, “would almost certainly backfire”.
Unwinding Fed’s Balance Sheet Won’t Work
Roubini dismissed Warsh’s belief that unwinding the Fed’s balance sheet will allow the central bank to cut policy rates sharply, saying that “he is simply wrong about this”.
“Warsh’s opposition to the current ample-reserves regime may come back to bite him,” Roubini added, according to the report.
“Under the post-2008 regime, the interest rates on excess reserves paid to banks nullify the impact of those reserves on credit creation and financial conditions. That is why the Fed has been able to reduce its balance sheet by 25% without triggering tighter financial conditions. There is no reason to think that more QT will justify much lower policy rates,” he reportedly said.
Single Rate Cut Not Enough
As per Roubini, recent economic data suggests that the growth in the U.S. remains above potential, and could even accelerate in 2026 after a modest soft patch in the previous year, while inflation remains stubbornly above the Fed’s 2% target.
“So, even the single rate cut that the FOMC has penciled in for 2026 may not be justified. With other risks looming – like a protracted war with Iran that sends oil prices higher and puts upward pressure on inflation and inflation expectations – the Fed may well find itself raising rates, rather than cutting them,” he said.
Meanwhile, U.S. equities continued their downturn on Friday. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was down 1.25%, the Invesco QQQ Trust ETF (QQQ) fell 1%, while the SPDR Dow Jones Industrial Average ETF Trust (DIA) slumped 1.4%.
Retail sentiment around the S&P 500 ETF on Stocktwits was in the ‘neutral’ territory at the time of writing.
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