There is a chance the U.S. Federal Reserve could unleash another round of quantitative easing by the end of the year, according to renowned economist Nouriel Roubini.
In an interview with CNBC on Saturday, the head of Roubini Global Economics said the probability of QE3 will become “significantly higher” if U.S. economic weakness persists and the stock markets correct 10 percent or more.
“Especially because we cannot do another round of fiscal stimulus, the pressure is going to be on the only policy that is available, [that] is another round of quantitative easing,” he said.
Roubini, who correctly predicted the financial crisis that began in 2008, is especially concerned about the myriad problems the U.S. economy currently faces.
“You have the problems of rising oil prices, of [a] weak labor market, of housing double dipping, the fiscal problem in the state and local government, the facts of the federal deficit problem,” he said. “All these things imply that economic weakness could persist in the second half of the year.”
Roubini believes the current slowdown in global growth is not “just a soft patch,” and the biggest risk to the financial markets comes from the troubled euro zone economies.
“They're still in risk and they've not been resolved and [will] eventually require debt restructuring.”
With regards to Greece, he says it’s not a matter of if there's going to be restructuring, but rather “whether it's going to occur sooner or later, and whether it's going to be orderly or disorderly.”
Emerging Markets & China
Even as QE2 winds down at the end of the month, Roubini is not expecting an outflow of capital away from emerging markets, as many investors have feared.
“First of all, the fed is not going to raise interest rates for a long time; two, they're not going to reduce base money,” he said. “And if they're not going to increase it further, and therefore the fundamentals of relative growth differentials, or relative interest differentials and still a wall of liquidity chasing assets are going to imply that money could flow and continue to flow into emerging markets.”
If, however, money does flow out of emerging markets at the end of QE2, it would be because of risk aversion in the event the global growth scare worsens and drives investors back towards the safety of the U.S. dollar and Treasurys, Roubini said.
On China’s battle against inflation, Roubini said two factors will determine whether inflation has turned the corner, or will continue to scale higher.
“One is whether the increase in oil, energy and commodity prices is going to continue,” he said. “Two, it depends on how much China is able to slow down their economy through monitoring their credit and other types of controls and they've done somehow but they've not done enough.”
China will release the closely-watched May inflation data on Tuesday, which is expected to show inflation rate exceeding 5 percent for the month.
- By CNBC's Li Anne Wong