Nouriel Roubini — known as “Dr. Doom” for his often-dire predictions — thinks we’re in the early stages of a credit bubble that will be difficult to avoid given the Federal Reserve’s current predicament.

“We’re in the beginning I would say even of a credit bubble, just at the beginning of it, we’re not yet full-fledged, but a year or two from now with policy rates still barely above zero, the risk is it becomes a fully-fledged,” Roubini tells FOX Business Network, adding, “Maybe today there’s not a bubble in the U.S. stock market.  But if we’re going to exit so slowly, then what’s the risk that we’d have a bubble in credit or in the stock market or in financial market a year from now, two years from now?”

Roubini says that the biggest risk he sees “is not when the Fed is going to finish tapering or when it’s going to be first rate hike.  It’s going to be managing the fact that you have only one policy interest rate.  You have to achieve economic stability and recovery.  And you have to avoid bubbles and frothiness in financial markets and now central banks have another objective: financial stability.  You have only one instrument and damn if you do and damn if you don’t.  If you exit too soon you have a bond market crash and you have a killing of the economy.  If you exit too slowly too late, you create a financial bubble, that’s going to be the biggest challenge that the Fed will have to face in the next three, four years.” 

 Roubini also says he thinks China’s slowdown will be more significant than many expect. But he does add a note of optimism for investors, saying that emerging market stocks seem poised for a rebound. “I think that the policy adjustment, some of this correction has been excessive, some reforms are going to occur and maybe in some of the geopolitical risk around the world it will be kind of toned down then, you might see actually a rally in the equities in the second half of the year,” he says.