Stephen Roach: Fed is concerned about shifting risks, U.S. equity market faces correction

（原标题：Stephen Roach: Fed is concerned about shifting risks, U.S. equity market faces correction）

Zhou Rui, Southern Finance Omnimedia Corp.(SFC) Correspondent in New York

The U.S. Federal Reserve is widely anticipated by market observers to cut rates as early as this September, even while inflation stays firm and growth indicators weaken. U.S. equities are still near record highs, with valuations heavily concentrated in a few tech giants. At the same time, global trade tensions and tariff risks are adding new pressure on capital flows, especially in emerging markets.

In this context, Stephen Roach, Senior Fellow at Yale University and former Chairman of Morgan Stanley Asia, shares his views on the Fed’s policy path, the risks of a U.S. economic slowdown, and the AI-driven stock market boom.

SFC: Right Now there's market consensus that expects the Fed will cut interest rates in September. On the other hand, inflation remains sticky, and GDP growth and employment are showing signs of softening. So in your opinion, is there a risk that the Fed could shift to an easing cycle too soon, either under political pressure or due to economic risks? If so, what impact might this have on global capital flows and emerging markets, especially China?

Stephen Roach: I do not think the Federal Reserve will adjust its policy due to political pressures. I do think, as Fed Chair Powell said at Jackson Hole very recently, that the Fed is concerned about shifting risks, largely focused on the labor market, noting that the underlying indications of labor market activity point to a particularly fragile outcome going forward, which suggests that the unemployment rate could rise in the months ahead. And that conclusion, together with his view that tariff-related impact, while they will boost inflation, that impact is likely to be temporary rather than permanent, is consistent with more of an accommodative monetary policy than the Fed has embraced recently. The full extent of that, as always, will be data-dependent.

This was not a huge surprise for the markets. Futures markets have been discounting a fairly aggressive multi-meeting easing ahead of the Jackson Hole comments. There's maybe a little bit more confidence in that outcome today than there was prior to his speech at Jackson Hole.

SFC: How many rate cuts do you predict there will be in the remaining of 2025?

Stephen Roach: I'm not going to get in the business of predicting the number and the magnitude. I think I would just stay with the conclusion of the Fed Chair that the balance of risks has shifted somewhat, not dramatically. And depending upon how the data play out, both in the labor market and in the inflation statistics, the Fed could certainly lower its policy rate somewhat.

I think they'll be cautious in doing it for a number of reasons. Number one, the Fed is always careful in reaching dramatic conclusions on the basis of partial data. And number two, an aggressive move at this point would raise the possibility that the Fed was being pressured by political forces.

And that's the last thing that the Federal Reserve wants to show at this point in time.

SFC: Previously in an interview, you mentioned that the U.S. economy probably is going to face a major recession risk around 2026, which is next year. Do you still hold that view today? And if so, what factor reinforced your concern?

Stephen Roach: Well, business cycles don't last forever. And we often have short-term cycles of both boom and bust. The U.S. economy now is slowing. There's little doubt about that.

That shows up in the GDP statistics, the employment statistics, and most importantly, I think, in the consumer demand statistics, where the growth rate of consumption is running at about half the rate of the past several years. I think the risk of further downside correction in both the labor markets, consumer demand, and overall GDP will reflect the cross-current of several developments, not the least of which are the tariff hikes, but also quite possibly a bubble on AI infrastructure spending by major AI providers, they're building like crazy.

This is the one sector that is providing probably the most support to the U.S. economy right now. I think there's a lot of redundancy in that capacity along the lines of what we saw with the rapid data processing capacity of the financial services sector in the 1990s. And I think there'll probably be a shakeout of that in the years ahead.

SFC: You just mentioned that the markets have cycles, bears and bulls. So U.S. equities remains nearly record highs, but valuations are increasingly concentrated in the large cap technology sector. Do you believe that U.S. stock market is entering a bubble territory? What effect or potential spillover effect risks would that have on global markets?

Stephen Roach: Yeah, I think the U.S. equity market right now is overvalued. 

I worry in particular about the concentration risk of the market focused so acutely on the AI sensitive stocks, the so-called Magnificent Seven. They now account for probably somewhere around 35 percent of the total market capitalization of the S&P 500. And that, by my calculations, is about six times the magnitude of the concentration risk that occurred prior to the bursting of the dotcom bubble in March of 2000.

So a lot of bets have been made on the AI miracle. I don't doubt that there is a revolutionary trend at work, but I think investors and businesses have probably gone much, much too far in riding the AI wave. And I think that will inevitably correct.

SFC: Looking ahead into probably like in the next six months or even longer, do you think the AI wave would still lead the market to increase?

Stephen Roach: Hard to say. Again, the exact timing of a sharp correction is almost impossible to predict, especially with so much noise coming out of the Trump administration, tariff threats and other types of dramatic shifts in policy, not the least of which is trying to take over the Federal Reserve system right now. Any one of a number of possibilities could lead to a correction.

But based on fundamentals, especially my concerns about sluggish consumer demand and an overextended AI valuation risk in the equity market, I would think that some type of correction could occur within the next six months.

SFC: What is your outlook for the U.S. dollar and U.S. bonds? If there is a correction in the stock market or the economy face a major recession risk? 

Stephen Roach: Well, there's a cross-current of factors at work in the bond market. If the economy weakens dramatically,  I think markets will embrace an even more aggressive trajectory for the Fed.

That will lead to further weakening of the dollar. It's not clear if that will be manifested in the form of lower bond yields, which is normally the case in a downturn. Because there's been, number one, so much intense political pressure on the Fed. And number two, a massive rethinking of the long-term budget trajectory as implied by the passage of the so-called Big Beautiful Bill Act of 2025, which raises deficit and public sector debt trajectories well above what had been the case earlier. That will prevent the bond market, I think, from experiencing the type of sharp rally that it normally does in a downturn.

SFC: Speaking about the political risks that the Federal Reserve faces, recently, U.S President Donald Trump has tweeted that he wanted to remove Fed governor Lisa Cook. Do you see this as a threat to the Federal Reserve's independence?

Stephen Roach: Well, it certainly is a threat, whether or not he's going to be able to get away with firing a Fed governor who is a key leading official for a politically independent central bank in the United States. That will have to be adjudicated in the courts. Thus far, there have been no legal charges filed.

And it's pretty clear that the act in question took place long before Lisa Cooke took up her responsibilities as a Fed governor. She's indicated a willingness to certainly take legal action of her own to prevent this outcome. And I think that this will be what could be a very significant challenge of the president's executive authority moving into areas that a U.S. president has never dared to move before.

But that's sort of been what President Trump is all about. And it remains to be seen how this will turn out. The Supreme Court in a ruling a few months ago did underscore the fact that while it gave the president broad authority to take actions to reduce the scope of many federal agencies, that it viewed the Federal Reserve as an exception, underscoring its independence from politics. But I suspect the Trump administration will push to have that decision challenged as well.