MNI INTERVIEW2: Only US Recession To Stem Prices-Ex BOJ Deputy

The Federal Reserve will not achieve its price objective without pushing the U.S. into a recession, former Bank of Japan deputy governor Hirohide Yamaguchi told MNI, adding that recent U.S. banking failures point to financial market volatility ahead.

“The FRB [Federal Reserve Board] has been behind the curve battling inflation and is still maintaining its stance of raising rates,” Yamaguchi, chairman at Nikko Research Center and BOJ Deputy Governor between 2008-2013 said in an interview.

“As a result of this, stock prices may fall further, and real estate prices may also fall significantly. However, it will be difficult for the Fed to stabilise prices without such influence,” he said.

The Fed can only achieve its 2% price target if the U.S. economy falls into “a recession,” he said.

ASSET PRICES

“I have long been concerned that the continuation of large-scale monetary easing will eventually lead to various influences such as large fluctuations in asset prices and destabilisation of the financial system,” Yamaguchi said, adding that this year’s failures of mid-sized U.S. banks showed that his fears were being realised.

While investors hope the Fed will limit rate hikes, market interest rates will rise anyway if it fails to contain inflation, said Yamaguchi, who has voiced concerns over asset bubbles and a U.S. recession for some time.

“If that happens, whatever the FRB does, interest rates will rise and stock prices will fall, triggering concerns over the financial system.”