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Former Fed economist Stephen Roach sounds the stagflation alarm: ‘The markets are not even close to discounting the full extent’

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A combination of high inflation and slowing growth is setting the U.S. on a path to stagflation, according to a renowned former Federal Reserve economist Stephen Roach.

It’s the same poisonous blend that plagued the U.S. in the '70s.

During a period of stagflation the economy could be barely growing and experiencing high unemployment while people face high prices.

“This inflation problem is widespread, it’s persistent and likely to be protracted,” said Roach, who is now a senior fellow at Yale University’s Jackson Institute for Global Affairs, on CNBC earlier this week.

The rate of inflation has been steadily rising since last year and was above 8% year over year for the last two months, according to the Bureau of Labor Statistics. Although it declined from 8.5% in March to 8.3% in April, inflation was still higher than many economists expected.

To tackle the issue, the Fed has announced two interest rate hikes, including raising rates half a percent at its meeting earlier this month—something it hasn’t done since 2000. Fed Chairman Jerome Powell was confirmed for a second term last week and has declared he is determined to bring down inflation.

“What we need to see is inflation coming down in a clear and convincing way,” Powell said at a Wall Street Journal conference this week. “And we’re going to keep pushing until we see that.”

But the Fed’s actions may not be enough to tackle the inflation problem, Roach told CNBC, especially because Powell said earlier this month that the central bank wasn’t considering rate hikes higher than 0.5%.

”By ruling out [a rate hike] larger than that he [Powell] just sends a signal that his hands are tied,” Roach said. “The markets are uncomfortable with that conclusion.”

It’s been a rough few weeks for the stock market, with concerns about inflation, the war in Ukraine, and the possibility of more Fed rate hikes weighing on markets. On Friday, all three major indexes, the Dow Jones Industrial Average, S&P 500, and Nasdaq, were on track to finish the week down 3.5%, extending several weeks of losses. The S&P 500 and Nasdaq were on course for a seventh straight weekly loss, while the Dow was looking at its eighth straight weekly loss, which hasn’t happened since 1932, according to the Wall Street Journal.

Still, we may not be near the market bottom yet, said Roach.

“The markets are not even close to discounting the full extent of what’s going to be required to bring the demand side under control,” Roach said.

This story was originally featured on Fortune.com