Negative economic growth in the first half of the year could be a harbinger of a much deeper recession that could last until 2024.

Stephen Roach, former chairman of Morgan Stanley Asia, warns that the US needs a “miracle” to avoid recession.

“We’re definitely going to have a recession when the lagged effects of this major monetary tightening kick in,” Roach said Monday on CNBC’s “Fast Money.” “They weren’t kicking at all now.”

Roach, a senior fellow at Yale University and a former Federal Reserve economist, suggests Fed Chairman Jerome Powell has no choice but to adopt Paul Volcker’s approach to tightening. In the early 1980s, Volcker aggressively raised interest rates to curb rampant inflation.

“Go back to the pain Paul Volcker had to inflict on the American economy to cause inflation. He should have raised the unemployment rate above 10%,” Roach said. “The only way we won’t do that is if the Fed under Jerome Powell keeps its word, focuses on discipline, and moves the real federal funds rate into the restrictive zone. And the containment zone is a long way from where we are now.”

Despite the Fed’s steep rate hike trajectory, the unemployment rate is 3.5%. This is the lowest level since 1969. That could change on Friday when the Bureau of Labor Statistics releases its August report. Roach predicts that the rate will definitely start to rise.

“The fact that it hasn’t happened and the Fed has done a significant tightening of monetary policy to date shows how much work they have to do,” he noted. “The unemployment rate should probably be above 5%, hopefully not much higher than that. But it could go to 6%.”

The final tipping point may be consumers. Roach suggests that they will soon capitulate due to persistent inflation. Once they do, he predicts that spending cuts will ripple through the economy as a whole and create pain in the labor market.

“We’re going to have to have a cumulative economic downturn [GDP] somewhere between 1.5% and 2%. And the unemployment rate should rise at least 1-2 percentage points,” Roach said. “It’s going to be a garden-variety recession.”

“Cold War” with China

Abroad, the forecast is not much better.

He expects the global economy to sink into recession as well. He doubts China’s economic activity will mitigate the effects, citing the country’s zero-covid-19 policy, severe supply chain backlogs and tensions with the West.

Roach is particularly concerned about U.S.-China relations, which he writes about in his new book, “Accidental Conflict: America, China, and the Collision of False Narratives,” due out in November.

“In the last five years, we’ve gone from a trade war to a technology war and now to a Cold War,” Roach said. “When you’re on this trajectory of escalating conflict like we are, it doesn’t take much of a spark to turn it into something much more violent.”


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