His comments come almost a month after California-based Silicon Valley Bank in the US collapsed.  The closure of SVB is being touted as the largest bank closure since the failure of Lehman Brothers, which led to the 2008 financial crisis.  

The development has shocked the tech industry worldwide, as tech unicorns and SaaS were the biggest customers for SVB. Silicon Valley Bank in all had $209 billion in total assets and about $175.4 billion in total deposits, as of December 2022. 

Discussing more about the US economy, Roubini said that the tight labour market implies wage inflation is still too high in the US. 

“The fact that the labour market is still tight, the low unemployment rate, ageing of the population, restrictions on migration, falling labour force participation rate implies that the wage inflation is still too high,” he explained. 

Last month, the US Federal Reserve announced that it will raise the base interest rates by 0.25 percentage point, bumping the federal funds rate to a target range of 4.75 to 5.0 per cent. This move was the ninth straight hike, where the Fed Reserve raised rates in an effort to rapidly reduce liquidity to the financial markets and tamp down high inflation.  

The Fed’s decision comes as inflation hit 6 per cent year-on-year in February 2023, which is still among the highest levels in decades in the US, though slipping down from its highs last year. 

Talking about US’s inflation and Fed’s rate hikes, Roubini said the Fed has to increase interest rates further to achieve the two per cent inflation target. He said if the central bank does that, there can be a recession and financial instability in the US. 

“In the short run that may prevent a recession, in the short run the stock market may rally, but if you blink then there will be a de-anchoring of inflation and inflation expectation, there will be a more severe wage price spiral,” he said. 

He added that the Fed, just like India’s Reserve Bank of India (RBI), may pause the rate hike to achieve a balance.  

Last week, RBI governor Shaktikanta Das said that the central bank’s monetary policy committee unanimously decided to keep the policy rate unchanged at 6.50 per cent with readiness to act should the situation so warrant. Since May last year, the central bank has increased the rate by 250 bps over inflation concerns. 

Talking about the rate revision and financial conditions, Das said: "While we have kept the policy rate unchanged, this decision was taken based on our assessment of the macroeconomic and financial conditions with reference to information available up to today. Our job is not yet finished and the war against inflation has to continue until a durable decline in inflation closer to target is seen."

By Basudha Das - From BusinessToday