New York University economist Nouriel Roubini is presenting the case that the United States is “in the beginning of credit bubble,” alluding to signs that the debt market is overheating and the financial similarities between now and the start of the economic collapse.
Roubini believes the Federal Reserve, which has been continuing with its tapering efforts by reducing quantitative easing by an additional $10 billion to $55 billion per month, will begin to raise interest rates sometime in the middle of next year and boost fund rates to four percent by 2018.
According to Roubini, the 10-year Treasury yield will rise to 4.25 percent at that point from 2.6 percent now.
“All the risky things that were happening back in ’06 and ’07 are back again to the same level, if not more,” Roubini told Fox Business Network (FBN). “So we are in the beginning of a credit bubble, but just the beginning. A year or two from now, with the policy rate still barely above zero, the risk is that it becomes a full-fledged bubble.”
Roubini warned that if the Fed ends its easing initiatives then a bond market crash could occur and eventually destroy the economy: “If you exit too late, you create a financial bubble. That’s the biggest challenge for the Fed in the next three to four years.”
He noted that there might not be a bubble in stocks at the present time but there could be one in a year or two from now since the Fed is exiting slowly.
Delivering testimony to Congress on Thursday, Fed Chair Janet Yellen warned that the central bank’s astronomical $4 trillion balance sheet could take up to nearly a decade to shrink. However, Yellen explained that deciding the correct size of its portfolio isn’t on top of the agenda.
“We’ve not decided, and we’ll probably wait until we’re in the process of normalizing policy to decide, just what our long-run balance sheet will be,” she told lawmakers. “If we do that and nothing more, it would probably take somewhere in the neighborhood of five to eight years to get it back to pre-crisis levels.”