Nouriel Roubini predicts that U.S. President Donald Trump is more likely to escalate the war against Iran to pursue victory, rather than retreat and risk more severe consequences for the economy and global order.
In an interview during a conference of economists and business leaders at Lake Como, Italy, the former White House economist stated on Friday, "My baseline judgment is that the probability of escalation is over 50%. The likelihood of escalating and failing is smaller than escalating and winning, but it carries enormous risks."
The CEO of Roubini Macro Associates offered a relatively more optimistic view on the Iran conflict. He is widely known for issuing pessimistic warnings at critical moments during the 2008 global financial crisis.
Speaking at the Ambrosetti Forum in Cernobbio, Roubini said, "The more probable scenario is that if the U.S. and Israel escalate, the Iranian regime will collapse, leading to better outcomes in the medium term, even if oil prices rise in the short term. Therefore, both Trump and Israeli Prime Minister Benjamin Netanyahu have incentives to escalate and push for victory."
Roubini warned that prolonged conflict would harm the global economy. He indicated there is a tail risk: if the U.S. and Israel escalate and Iran further attacks oil facilities, "the situation could evolve into something resembling the 1970s."
He stated, "Even if the war ends tomorrow, oil prices will not return to pre-war levels." However, he added that a 10% to 15% rise in oil prices "would not be tragic."
When asked about implications for monetary policy, Roubini said the European Central Bank would likely have to raise interest rates in "April, or possibly even June," and the Bank of England might follow suit.
Roubini also suggested that the Federal Reserve could find itself in a difficult position. Policymakers might be forced to raise rates "to avoid the risk of inflation expectations becoming unanchored."
Roubini noted that the Fed "almost lost credibility" in 2022 due to delayed rate hikes. He also mentioned the upcoming leadership change at the Fed, with Kevin Warsh set to replace Jerome Powell as chair in May. "A new Fed chair cannot start their term by ruining their reputation," Roubini said, implying that the new chair may have no choice but to raise rates.
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