Nouriel Roubini, the economist famously known as “Dr. Doom” for forecasting the 2008 financial crisis, cautioned traders against banking on the Federal Reserve for a prompt resolution to the recent financial turmoil triggered by President Donald Trump’s tariffs on international trade.
Last week, Trump declared extensive tariffs on numerous countries, including a significant increase to 104% on Chinese imports. This announcement rattled financial markets as fears grew that it could lead the U.S. and other economies into recession.
The Nasdaq 100 dropped by 12%, while bitcoin (BTC), the biggest cryptocurrency by market capitalization, saw a decrease of 10%, briefly falling below $75,000. The U.S. Treasury market experienced heightened volatility, with yields on long-term bonds spiking, pushing prices down even as stock markets plunged. This scenario has sparked concerns of a serious dollar liquidity crisis reminiscent of the events five years ago during the COVID-19 crash.
There is widespread speculation that the Federal Reserve will soon implement measures to improve liquidity conditions, as it did back in 2020, potentially providing value support for assets. Traders have factored in at least five quarter-point interest rate cuts from Fed Chair Jerome Powell for this year, as indicated by the CME’s FedWatch tool. However, Roubini argues that this scenario is unlikely.
“There is indeed a game of chicken between the Trump put and the Powell put. However, I believe that the strike price for the Powell put will be set lower than that of the Trump put, suggesting Powell will wait for Trump to make a move first,” Roubini shared.
Essentially, Powell may hold off on intervening to ease market volatility until Trump takes steps to mitigate his aggressive stance, which has significantly contributed to the current instability.
A single tweet from Trump signaling a potential trade agreement or dialogue with China could quickly shift sentiment in financial markets. A recent event illustrates this: on Monday, an unverified report of a tariff pause caused a rapid rise in market values, only for the news to later be revealed as false.
Persistent Inflation with No Recession
Roubini, who oversees Roubini Macro Associates, anticipates that inflation will remain persistent in an environment of elevated tariffs, adversely impacting long-term bonds. This expectation helps to explain the decline in 10- and 30-year U.S. Treasury notes and the corresponding rise in yields.
Additionally, he expresses confidence that the U.S. will sidestep entering a recession, contrary to prevailing market sentiment and betting odds that indicate more than a 50% likelihood of consecutive quarters with declining growth rates.