The Fed Will ‘Wimp Out’ on Tightening, Roubini Predicts

Don’t look for the Federal Reserve to make good on its plans to bump up short-term rates or to end its bond buying for a while, says economist Nouriel Roubini, known for his bearish views.

“They are going to wimp out,” the CEO of Roubini Macro Associates said in an interview with Bloomberg Television. “They are going to postpone any finishing of tapering or raising rates.”

The Fed has indicated that it intends to begin tapering its $120-billion-per-month bond-buying campaign, likely starting later this year and ending next summer. The so-called dot plot from its September meeting, a poll of Fed board members’ projections, signaled they are evenly split on whether to start boosting the federal funds rate in 2021 or 2022.

Roubini described a stagflation scenario, where inflation above 3% persists for several quarters and economic growth slows. The just-reported Consumer Price Index (CPI) for September, up 5.4% from 12 months before, adds some impetus to the inflation part of the equation. Higher inflation numbers began cropping up in the spring. And analysts have lowered their estimates for gross domestic product (GDP) growth, albeit not to any alarming level. The Conference Board estimates the economy will slow to a 3.5% yearly pace in the third quarter, down from 6.7% in the second period.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Stagflation, meaning growth slides as inflation accelerates, will be with us “for several quarters,” Roubini said. He is listened to because of his one huge spot-on forecast. Nicknamed Dr. Doom, he won renown for predicting the housing bust and its devastating effect on the world economy, an augury that came true in 2008.

Let’s face it: Roubini’s idea of stagflation lacks the extremes, longevity, and destructive power of the 1970s version. But his stagflation, as he describes it, will have its most profound impact on Fed policy and those of other central banks. “It becomes a very tough dilemma for central banks,” he said. If growth slows, the Fed will “end up being dovish.”

Although the Fed’s official line is that the current inflation spurt is temporary, Roubini pointed to evidence that some of its causes show little signs of abating, namely supply chain bottlenecks and labor shortages. And these forces also are slowing economic growth, he noted.

None of this will be kind to the stock market, he added. Ditto for bonds, as he expects long bond yields to potentially keep escalating, pushing down their prices. The 10-year Treasury closed Tuesday at 1.58% and has traveled quite a distance since early August, when it was 1.17%.

Roubini’s recommendations for refuge interim investments were pretty standard fare for an inflation scenario: Treasury inflation-protected securities (TIPS), real estate, and commodities such as gold and oil. He predicted that oil, now going for just about $80 per barrel, likely will reach $100 before too long, depending on the winter weather and factors such as the behavior of foreign crude producers like Saudi Arabia.

Why the Fed Won’t Tighten Soon: Too Much Unemployment, Says Strategist

Dr. Doom Forecasts a Recession in 2020

Tags: 10-Year Treasury, dot plot, Dr. Doom, Federal Reserve, GDP, Inflation, Nouriel Roubini, stagflation, taper

Dartmouth College and its $8.5 billion endowment will phase out the school’s investments in fossil fuels and let its remaining public holdings in the sector expire.

The college announced the move as part of its plan to address climate change, which focuses on three areas of impact: research and education, energy efficiency and resiliency on campus, and strategic investment of endowment funds, which includes investing in energy transitions while reducing all fossil-fuel holdings to zero.

Dartmouth cited increasingly powerful hurricanes, more severe droughts, and longer fire seasons as evidence that the effects of climate change are “real, far-reaching, and getting worse,” and it blamed the warming of the atmosphere on the production and consumption of fossil fuels.

“The Dartmouth Investment Office believes the energy transition and a subsequent zero-carbon future are important and are influential themes in the economy,” Dartmouth Investment Office CEO Alice Ruth said in a statement. “As stewards of the endowment, our team is committed to understanding these themes and will make suitable investments, including in renewables, the broad energy transition, and other innovative technologies that support a timely global path to net-zero emissions.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Ruth added that the investment office has increased its conversations regarding environmental issues with all prospective and current investment managers as part of its environmental, social, and governance (ESG) due diligence process.

In 2017, Dartmouth committed to a set of sustainability goals, such as cutting greenhouse gas emissions from campus operations in half by 2025 and by 80% by 2050. It said it aimed to reach this goal by switching the campus heating system to a more sustainable fuel source, increasing the energy efficiency of buildings, and establishing a better system to distribute energy across campus. So far, the college says it has made or will make more than $400 million in investments to fund programs, centers, and institutes that will advance teaching, research, faculty-student partnerships, and interdisciplinary collaboration to address climate change.

“The climate emergency is urgent, and Dartmouth has committed to being part of the solution by generating new knowledge through our research and continuing to educate leaders in the field of sustainability,” Dartmouth President Philip Hanlon said in a statement.

The announcement comes less than a month after Harvard University and Boston University both pledged to divest their respective endowments from fossil fuels.

Dartmouth reported a 46.5% investment return for the fiscal year ending June 30, with 10-year annualized returns of 12.8%.

“The growth of the endowment is fueled by the generosity of our donors, a strong market performance, and a talented investment office,” Hanlon said.