Prepare for US house prices to slump, unemployment to spike, and a recession to set in, Harvard economist Kenneth Rogoff says

• Harvard economist Kenneth Rogoff expects a slump in US house prices and a wave of job losses.

• The Fed will likely have to keep interest rates higher for a while to crush inflation, he said.

• Rogoff expects that to hit asset prices and economic growth, making a recession a near certainty.

  
  

Prepare for house prices to slump, unemployment to spike, and the US economy to slip into recession, Kenneth Rogoff has said.

The Harvard University economist issued his dire outlook during a Fox Business interview on Thursday. He warned the Federal Reserve may have to keep interest rates higher for a while to curb inflation, likely pulling down asset prices, sparking job losses, and shrinking the economy.

"The Fed is nowhere near having conquered inflation," Rogoff said. "It's going to be hard to avoid at least a mild recession."

Inflation soared to a 40-year high of 9.1% in June, and clocked in at 7.1% in November — well above the Fed's target of 2%. The US central bank has responded by hiking benchmark rates from virtually zero in March to a 15-year high of over 4% currently, in an effort to cool demand and rein in price pressures.

Higher rates can temper inflation by encouraging saving and making borrowing more expensive. However, they can also sap economic growth and increase unemployment by discouraging spending, investing, and hiring.

Rogoff predicted elevated rates throughout 2023, as the Fed won't want to cut them until it's sure the inflation threat has faded and it won't have to backtrack and raise rates again. He also suggested that crushing inflation will probably require substantial job losses.

"A lot of sectors of the labor market are still red hot," he said. "The wage growth is still coming in future months, it's going to push up prices, and it's hard to see how you turn around that dynamic without having unemployment go up quite a bit."

The former chief economist of the International Monetary Fund noted that more than a decade of rock-bottom interest rates boosted the prices of stocks, homes, bitcoin, art, and other assets. Now that rates are higher, and mortgage costs have soared as a result, he expects home prices to drop.