Roubini: Fed's dilemma has become a trilemma

The credit crunch caused by today’s banking stress is likely to create a harder landing for the real economy, according to New York University's Professor Emeritus of Economics Nouriel Roubini, a.k.a 'Dr. Doom'.

In an interview with Yahoo Finance's Rachelle Akuffo, Roubini said, "Even before this banking stresses, the FED was facing a dilemma," referring to its goal of achieving price stability while maintaining growth –– which Roubini notes would be difficult to accomplish through interest-rate hikes due to the risk of a hard landing. Roubini went on to say, "The dilemma has become a trilemma."

"In addition to price stability and maintaining growth, we also need financial stability, and as you raise rates, you create more stresses for both creditors and borrowers," said Roubini, "therefore, you have only one policy instrument. In this case, the Fed funds rate to hit three targets: price stability, growth and financial stability. To me, that looks like mission impossible."

Watch our full conversation with Nouriel Roubini here.

Key video moments:

00:00:04 The Federal Reserve's dilemma

00:00:16 The Federal Reserve's trilemma

Video Transcript

- Even before this banking stresses, the Fed was facing a dilemma. Because either you raise rates to fight inflation and you cause a recession, or if you care about job growth, and you don't raise rates enough then you have a demand or an expectation. Now the dilemma has become a trilemma because in addition to price stability, maintaining growth, we also need financial stability.

And as you raise rates you create more stresses for both creditors and for borrowers. And therefore, you have only one policy instrument in this case, the Fed funds rate, to hit three target price stability, growth, and financial stability. To meet that looks like mission impossible.